LASER POWER CORP/FA, 424A, 1997-05-09

LASER POWER CORP/FA
424A, 1997-05-09
OPTICAL INSTRUMENTS & LENSES

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<PAGE> 1

This filing is made pursuant to Rule 424(a) under the Securities Act of
1933 in connection with Registration No. 333-24421

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.

SUBJECT TO COMPLETION, DATED MAY 6, 1997
PROSPECTUS

2,400,000 SHARES

LOGO

COMMON STOCK
------------------------

Of the 2,400,000 shares of Common Stock offered hereby, 2,000,000 shares
are being sold by Laser Power Corporation ("Laser Power" or the "Company") and
400,000 shares are being sold by certain stockholders of the Company (the
"Selling Stockholders"). The Company will not receive any portion of the
proceeds from the sale of shares by the Selling Stockholders. See "Principal and
Selling Stockholders."

Prior to this offering, there has been no public market for the Common
Stock of the Company. It is estimated that the initial public offering price
will be between $6.50 and $8.50 per share. See "Underwriting" for a discussion
of the factors to be considered in determining the initial public offering
price. The Company has applied for quotation of the Common Stock on the Nasdaq
National Market under the symbol "LPWR."
------------------------

SEE "RISK FACTORS" BEGINNING ON PAGE 5 FOR INFORMATION
PROSPECTIVE INVESTORS SHOULD CONSIDER.
------------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------

<TABLE>
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------
UNDERWRITING PROCEEDS TO
DISCOUNTS PROCEEDS TO SELLING
PRICE TO PUBLIC AND COMMISSIONS(1) COMPANY(2) STOCKHOLDERS
- -------------------------------------------------------------------------------------------------------
Per Share......................... $ $ $ $
- -------------------------------------------------------------------------------------------------------
Total(3).......................... $ $ $ $
=======================================================================================================
</TABLE>

(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Act"). The Company has also agreed
to sell to the Representatives of the Underwriters warrants to purchase up
to 200,000 shares of Common Stock exercisable at 130% of the initial public
offering price per share (the "Representatives' Warrants"). See
"Underwriting."

(2) Before deducting expenses payable by the Company estimated at $912,500,
including the Representatives' non-accountable expense allowance.

(3) The Company has granted to the Underwriters a 45-day option to purchase up
to 360,000 additional shares of Common Stock solely to cover
over-allotments, if any. If such option is exercised in full, the total
Price to Public, Underwriting Discounts and Commissions and Proceeds to
Company will be $ , $ and $ , respectively. See
"Underwriting."
------------------------

The shares of Common Stock are offered by the several Underwriters, when,
as and if delivered to and accepted by the Underwriters and subject to various
prior conditions, including their right to reject any orders in whole or in
part. It is expected that delivery of share certificates will be made against
payment therefor at the offices of Cruttenden Roth Incorporated in Irvine,
California, or through the facilities of Depository Trust Company, on or about
, 1997.

<TABLE>
<S> <C>
CRUTTENDEN ROTH L.H. FRIEND, WEINRESS,
INCORPORATED FRANKSON & PRESSON, INC.
</TABLE>

THE DATE OF THIS PROSPECTUS IS , 1997
<PAGE> 2

A WORLD OF APPLICATIONS

HIGH PERFORMANCE OPTICS

[photographs of various types of high performance laser optics]

Laser Power provides high performance precision optics for a wide range of
demanding industrial, medical and military applications.

INDUSTRIAL FABRICATION

[photograph of high power laser cutting sheet metal]

Thousands of high power CO(2) laser systems employing the Company's optics
operate throughout the world precisely cutting metal and other materials. With
laser cutting, there is rarely any need for further finishing of the edges
before these parts are assembled in an increasing number of products such as
automobiles, recreational vehicles, farm equipment, office furniture and
construction equipment.

. . . OPTICS FOR TODAY

HIGH POWER TECHNOLOGY

[photograph of a transmission gear ]

Growing acceptance of laser material processing is rapidly increasing the number
of high power applications, for example in the automated CO(2) laser welding of
transmission gears.

LASER BEAM

[drawing of the focusing optic of a laser]

Laser Power's patented Turbo-Cooled technology allows focusing optics to handle
the power of multikilowatt CO(2) lasers for deep-penetration welding and
thick-section cutting in a wide range of metals.

IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP
MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON
NASDAQ IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING."

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING BY ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."

The Company intends to furnish annual reports to stockholders containing audited
financial statements, quarterly reports and such other periodic reports as it
may determine to be appropriate or as may be required by law.

Turbo-Cooled(R), Laser Power (stylized)(R), and the Laser Power logo are
registered trademarks, and MP-5 is a trademark of the Company. All other
trademarks or service marks used in this Prospectus are the property of their
respective holders.
<PAGE> 3

PROJECTION DISPLAY

Laser Power believes that projectors based on its microlasers will be superior
to existing electronic projectors in color accuracy, color range, brightness,
uniformity, operating efficiency and lifetime performance. These advantages will
be important, in the emerging application of electronic cinema. Laser Power also
anticipates that both front and rear microlaser-based projectors will gain
acceptance and use for a wide range of applications, including location based
entertainment, auditoriums, control rooms, video walls, simulators and technical
conferencing.

[Photograph of dermatological procedure performed using a laser]

[Photograph of dental procedure performed using a laser]

[Photograph of laser use in a medical operating room]

. . . MICROLASERS FOR TOMORROW

[Drawing of a microlaser and a photograph of a movie theater]

ADVANCED MEDICINE

Laser Power believes that several applications now addressed by conventional
lasers of substantially larger size and lower operating efficiencies represent
immediate opportunities for its green and blue microlasers. The Company believes
that microlasers can be used in the existing markets for ophthalmology,
biomedical analysis, vein, lesion and tattoo removal and the emerging market for
teeth whitening and curing of fillings.

<PAGE> 4

[continuation of photograph of movie theater]

FIBER OPTIC TELECOMMUNICATIONS

Fiber optic based telecommunications systems provide significant performance
advantages over traditional systems which use copper wire and cable, including
longer distances before amplification, greater bandwidth and information
handling capacity and higher resistance to electronic interference. Laser
Power's tunable 1550 nanometer microlasers currently under development are
designed for use in head-end and dense WDM fiber optic telecommunications
applications for CATV and telephone use. The Company anticipates that its 1550
nanometer microlasers will deliver higher quality voice, video and data
information at a lower cost than existing technologies.

[Depiction of a fiber optic based telecommunications network]
<PAGE> 5

PROSPECTUS SUMMARY

This Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth under "Risk Factors" and elsewhere in this Prospectus.
The following summary is qualified in its entirety by the more detailed
information and the consolidated financial statements, including the notes
thereto, appearing elsewhere in this Prospectus. Except as otherwise noted, all
information in this Prospectus (i) assumes no exercise of the Underwriters'
over-allotment option, the Representatives' Warrants, other warrants outstanding
as of the date of this Prospectus, or options granted or reserved under the
Company's stock option plans, (ii) assumes no conversion of the outstanding
Series A Convertible Subordinated Debentures (the "Debentures"), (iii) reflects
the 1-for-1.5 reverse stock split of the Common Stock effected on April 25,
1997, and (iv) reflects the exchange of all outstanding shares of the Company's
Preferred Stock for 1,193,252 shares of Common Stock immediately prior to the
closing of this offering. See "Certain Transactions," "Principal and Selling
Stockholders," "Description of Capital Stock," "Underwriting" and Note 5 of
Notes to Consolidated Financial Statements.

THE COMPANY

Laser Power Corporation ("Laser Power" or the "Company") designs,
manufactures and markets high performance laser optics for industrial, medical
and military lasers and laser systems. Laser optics are precision lenses,
reflectors and mirrors used to reflect, collect and focus laser beams. The
Company's products are sold to laser system OEMs and end users as original and
replacement components in high power CO(2) and other lasers. The Company's core
competencies lie in its surface finishing and thin film coatings, which are key
elements involved in all high performance laser optics. The Company believes
that its expertise in these areas provides it with a significant competitive
advantage.

The Company's customers use high power CO(2) lasers in a variety of
industrial processing applications, such as sheet metal cutting, automobile body
welding, surface hardening for engine components and scribing and drilling
delicate ceramic circuits. The Company also sells high performance laser optics
to medical equipment OEMs for lower power CO(2) lasers used in certain
therapeutic and cosmetic procedures, including surgery and skin wrinkle removal.
In addition, the Company has developed very low absorption thin film coatings
for optics for laser anti-missile systems. The Company also conducts contract
research in the development and applications of advanced solid state lasers.
Substantially all of the Company's product revenues to date are attributable to
the sale of laser optics products for the industrial processing and medical
industries.

The Company has leveraged its expertise in thin film coatings, surface
finishing and solid state lasers to develop proprietary miniature solid state
lasers that are excited or "pumped" by diode lasers. These "microlasers" have
significant size advantages and are generally 100 times more energy efficient
than conventional gas and solid state lasers. Further, they have longer
estimated lifetimes than conventional gas and lamp pumped solid state lasers.
Laser Power shipped the first microlaser evaluation units in March 1997, and
expects to begin commercial deliveries of microlasers to a medical equipment OEM
to replace gas lasers in dermatology systems by the end of fiscal 1997. The
Company believes that microlasers can replace other lasers in additional medical
equipment. The Company is also developing microlasers for projection display and
telecommunications applications.

The Company's strategy is to expand its existing high performance laser
optics business through a continual improvement in quality and customer service
while introducing new products, such as the Company's low absorption,
non-radioactive MP-5 thin film coatings and Turbo-Cooled optics. The Company
also plans to leverage its optics expertise to enter new high margin markets for
high performance optics for yttrium aluminum garnet and visible lasers and thin
film filters for dense wavelength division multiplexers. In addition, to
increase margins on optics sales, the Company plans to increase manufacturing
automation and transfer additional labor intensive operations to its facility in
Mexico.

The Company's strategy is also to build its microlaser infrastructure by
entering lower volume medical, biotechnology and industrial markets where the
Company's blue and green microlasers can replace other lasers. This
infrastructure will then serve as the platform for launching microlasers in
higher volumes for projection display applications. In addition, the Company has
developed prototypes of microlaser based projectors for the high end, high
resolution projector market. The Company also is developing a microlaser for
fiber optic telecommunications applications. The Company's strategy is to use
this microlaser as a platform to build a family of telecommunications products.

The Company was incorporated in California in August 1979 and
reincorporated in Delaware in July 1983. The Company's executive offices are
located at 12777 High Bluff Drive, San Diego, California 92130, and its
telephone number is (619) 755-0700.

3
<PAGE> 6

THE OFFERING

<TABLE>
<S> <C>
Common Stock offered by the Company.......... 2,000,000 shares
Common Stock offered by Selling
Stockholders............................... 400,000 shares
Common Stock outstanding after the
offering................................... 6,202,354 shares(1)
Use of Proceeds.............................. Additions to plant and equipment, repayment of
debt, working capital and other general
corporate purposes. See "Use of Proceeds."
Proposed Nasdaq National Market Symbol....... LPWR
</TABLE>

- ---------------

(1) Excludes: (i) 1,291,619 shares of Common Stock reserved for issuance upon
exercise of options outstanding as of March 31, 1997; (ii) 386,660 shares of
Common Stock issuable upon exercise of warrants outstanding as of March 31,
1997; (iii) 200,000 shares of Common Stock issuable upon exercise of the
Representatives' Warrants; (iv) up to 368,888 shares of Common Stock
issuable upon conversion of the Debentures; and (v) an aggregate of
1,250,000 shares of Common Stock reserved for future issuance under the
Company's 1997 Equity Incentive Plan (the "1997 Plan") and Employee Stock
Purchase Plan.

SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR ENDED AUGUST 31, FEBRUARY 29/28,
--------------------------------------------- -----------------
1992 1993 1994 1995 1996 1996 1997
------ ------ ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues:
Product sales............................. $8,622 $8,720 $10,158 $11,859 $15,194 $ 6,880 $ 7,995
Contract research and development......... 1,149 963 1,727 2,714 3,713 1,682 3,129
------ ------ ------- ------- ------- ------- ------
Total revenues..................... 9,771 9,683 11,885 14,573 18,907 8,562 11,124
Cost of revenues:
Product sales............................. 5,125 5,392 6,550 7,994 9,888 4,601 5,475
Contract research and development......... 941 766 1,308 2,059 2,942 1,262 2,502
------ ------ ------- ------- ------- ------- ------
Total cost of revenues............. 6,066 6,158 7,858 10,053 12,830 5,863 7,977
Gross profit:
Product sales............................. 3,497 3,328 3,608 3,865 5,306 2,279 2,520
Contract research and development......... 208 197 419 655 771 420 627
------ ------ ------- ------- ------- ------- ------
Total gross profit................. 3,705 3,525 4,027 4,520 6,077 2,699 3,147
Income (loss) from operations............... 485 (629) (745) (1,920) (918) (845) 480
Net income (loss)........................... $ 312 $ (816) $(1,013) $(2,269) $(1,231) $(1,004) $ 313
Pro forma net income (loss) per share(1).... $ (0.29) $ 0.06
Shares used in per share computations(1).... 4,311 4,887
OTHER DATA:
Effect of microlaser operations on income
(loss) from operations(2)............... $ -- $ (294) $ (983) $(2,104) $(2,035) $(1,161) $ (164)
</TABLE>

<TABLE>
<CAPTION>
FEBRUARY 28, 1997
--------------------------
PRO FORMA
ACTUAL AS ADJUSTED(3)
-------- --------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEETS DATA:
Cash and cash equivalents.................................................. $ 128 $ 11,951
Working capital............................................................ 1,992 14,886
Total assets............................................................... 12,728 24,551
Long-term debt, net of current portion..................................... 687 582
Subordinated convertible debentures........................................ 1,660 1,660
Total stockholders' equity................................................. 5,557 18,557
</TABLE>

- ---------------
(1) See Note 1 of Notes to Consolidated Financial Statements for a description
of the computation of the pro forma net income (loss) per share and the
number of shares used in the pro forma per share calculation.

(2) The Company's investment in microlaser technology and product development
has had a material effect on the Company's results of operations. Because of
its materiality, the effect of microlaser operations on income (loss) from
operations is presented separately. The effect of microlaser operations on
income (loss) from operations includes gross profit (loss), research and
development expenses and incremental selling, general and administrative
expenses. It does not include any allocations of corporate expenses,
interest or taxes.

(3) As adjusted to reflect the exchange of all outstanding convertible Preferred
Stock for 1,193,252 shares of Common Stock immediately prior to the closing
of this offering and to give effect to the sale of 2,000,000 shares of
Common Stock to be sold in the offering by the Company hereby at an assumed
initial public offering price of $7.50 and after deducting estimated
underwriting discounts and commissions and offering expenses and the
application of the net proceeds from the sale of such shares. See "Use of
Proceeds" and "Capitalization."

4
<PAGE> 7

RISK FACTORS

In addition to the other information contained in this Prospectus, the
following risk factors should be considered carefully in evaluating the Company
and its business before purchasing shares of the Common Stock offered hereby.
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from the
results discussed in such forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business" as well as those discussed elsewhere in this
Prospectus.

HISTORY OF OPERATING LOSSES AND ACCUMULATED DEFICIT

As a result of substantial investments in research and development, the
Company incurred operating losses in each of the last three fiscal years and, at
February 28, 1997, had an accumulated deficit of $4.9 million. The development,
sales, marketing and support of new products will require continued substantial
expenditures for the foreseeable future, which could result in additional
operating losses. The Company has funded a substantial portion of its product
development efforts through development contracts. Any failure by the Company to
maintain its external funding sources could result in increased operating
losses. There can be no assurance that the Company will maintain its external
funding sources or be profitable in the future or that the net proceeds of this
offering, together with any funds provided by operations and present capital,
will be sufficient to fund the Company's future capital requirements. See "Use
of Proceeds," "Selected Consolidated Financial Information," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business -- Research and Development."

COMPETITION

The industries in which the Company sells its products, and will sell its
products under development, are highly competitive. In each of the markets it
serves, the Company faces intense competition from established competitors, many
of which have substantially greater financial, engineering, research and
development, manufacturing, sales, marketing, service and support resources,
including greater name recognition, a larger installed base of products and
longer standing customer relationships. There can be no assurance that the
Company will be able to compete successfully in the laser optics, laser and
laser systems industries in the future, that the Company will be able to make
the technological advances necessary to maintain its competitive position or
that its new products will receive market acceptance. In addition, there can be
no assurance that technological changes or development efforts by the Company's
competitors will not render the Company's products or technologies obsolete or
uncompetitive. See "Business -- Competition."

DEVELOPMENT RISKS RELATING TO MICROLASER TECHNOLOGIES

The Company has devoted substantial resources to developing its microlasers
and future microlaser based products. To date, sales of the Company's
microlasers have been limited to customer evaluation sales. Other microlasers
and microlaser based products are still in the early stages of development.
There can be no assurance that the Company will successfully develop any
microlaser or microlaser based products. There also can be no assurance that the
Company's microlasers will be successfully designed into customers' products or
that the Company's products under development will achieve commercial sales
volumes. The Company believes that it will be necessary to continue to reduce
the cost of manufacturing and to broaden the variety of wavelengths provided by
its microlaser to achieve commercial acceptance. If the Company is unable to
successfully gain market acceptance of its microlasers and microlaser based
products, its business, operating results and financial condition will be
materially and adversely affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business -- Products and
Products under Development," "-- Laser Power's Strategy" and "-- Research and
Development."

5
<PAGE> 8

DEPENDENCE ON SOLE AND LIMITED SOURCE SUPPLIERS

Certain materials and components used in the manufacture of the Company's
products are currently obtained from single or limited source suppliers. The
Company purchases all of its zinc selenide (a critical raw material used in the
manufacture of the Company's optics) from Morton International, Inc. ("Morton").
In addition, the Company believes that Cerac Incorporated ("Cerac"), from which
the Company purchases all of its thorium fluoride for use in its low absorption
thin film coatings, is the sole source for high quality thorium fluoride. Any
interruption or cessation of supply by Morton or Cerac would have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company does not have long term or volume purchase agreements
with its suppliers, and there can be no assurance that materials and components
needed by the Company will be available in the quantities required by the
Company, if at all. See "Business -- Manufacturing."

DEPENDENCE ON NEW PRODUCTS AND PROCESSES

To meet its strategic objectives, the Company must continue to develop,
manufacture and market new products, develop new processes and improve its
existing processes. As a result, the Company expects to continue to make
significant investments in research and development and to consider from time to
time the strategic acquisition of businesses, products, or technologies
complementary to the Company's business. The success of the Company in
developing, introducing and selling new and enhanced products depends upon a
variety of factors, including product selection, timely and efficient completion
of product design and development, timely and efficient implementation of
manufacturing and assembly processes, effective sales and marketing and product
performance in the field. There can be no assurance that the Company will be
able to develop and introduce new products or enhancements to its existing
products and processes in a manner that satisfies customer needs or achieves
market acceptance. The failure to do so would have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Business -- Laser Power's Strategy" and "-- Research and Development."

DEPENDENCE ON PATENTS AND PROPRIETARY RIGHTS

The Company's success will depend in large part on the Company's ability,
and the ability of its licensees and licensors, to obtain patents for its
technologies and any products resulting from the application of such
technologies, to defend such patents once obtained and to maintain trade
secrets, both in the United States and in foreign countries. The commercial
success of the Company will also depend upon avoiding the infringement of
patents issued to others and maintaining the technology licenses upon which
certain of the Company's current products are, or any future products might be,
based.

The Company owns certain U.S. patents and has filed additional patent
applications in the United States and foreign jurisdictions. There can be no
assurance that other patents will be issued to the Company or its licensors as a
result of pending or future patent applications or that, if issued, such patents
will contain claims sufficiently broad to afford protection against competitors
with similar technology. Although the Company may file additional patent
applications outside the United States, the Company believes that obtaining
foreign patents may be more difficult than obtaining U.S. patents because of
differences in patent laws and believes the protection provided by foreign
patents, if obtained, and any other foreign intellectual property protection may
be weaker than that provided in the United States. There can be no assurance
that any patents issued to the Company or for which the Company has license
rights, will not be challenged, narrowed, invalidated or circumvented, or that
the rights granted under such patents will provide competitive advantages to the
Company. Litigation, which could result in substantial cost to the Company, may
be necessary to enforce the Company's patent and license rights, to enforce or
defend an infringement claim, or to determine the scope and validity of others'
proprietary rights. Some of the Company's competitors have, or are affiliated
with companies having, substantially greater resources than the Company, and
such competitors may be able to sustain the costs of complex patent litigation
to a greater degree and for longer periods of time than the Company.
Uncertainties resulting from the initiation and continuation of any patent or
related litigation could have a material adverse effect on the Company's
business, financial condition and results of operations. If others file patent
applications that claim technology also claimed by the Company, the Company may
have to

6
<PAGE> 9

participate in interference proceedings declared by the U.S. Patent and
Trademark Office (the "USPTO") to determine the priority of invention, or
opposition proceedings in a foreign patent office, either of which could result
in substantial cost to the Company, even if the outcome is favorable to the
Company. An adverse outcome could subject the Company to significant liabilities
to third parties and require the Company to cease using the technology or to
license disputed rights from third parties, which licenses may not be available
at reasonable cost, if at all.

The Company has acquired a license to a Leland Stanford Junior University
("Stanford") owned patent covering certain technology used in its blue
microlaser from ATx Telecom Systems, Inc. ("ATx Telecom"). The Company has
received a letter from a third party claiming that the Company's license was
transferred improperly by Stanford and ATx Telecom. While the Company believes
that such license was properly transferred, there can be no assurance that the
Company's license would not be voided if subjected to a legal challenge. In such
an event, there can be no assurance that the Company would be able to obtain a
replacement license on favorable terms, if at all. Failure to obtain such a
license would have a material adverse effect on the Company's business,
financial condition and results of operations.

The Company is aware that patents held by other parties may relate to the
Company's microlaser technology. The Company believes that it does not infringe
on such patents or believes that it has adequate design-arounds if it is held to
infringe such patents. The Company may, however, decide to enter into license
agreements with such patent holders to avoid costly litigation. There can be no
assurance that the Company will obtain any licenses that it might seek on
favorable terms, if at all. If it is determined that the patents held by these
other laser companies cover the Company's technology, the Company's inability to
obtain licenses for such technology could have a material adverse effect on the
Company's business, financial condition and results of operations.

The Company has developed certain of its proprietary technology pursuant to
development contracts, including contracts with federal government agencies.
Under standard provisions in government contracts, the government may retain
certain rights in technology developed under such contracts. In addition, under
its other development contracts, the Company has granted significant rights to
third parties. The Company's strategy is to continue to develop a significant
portion of its proprietary technology pursuant to funding received from
development contracts. There can be no assurance that the Company will be able
to continue to obtain funding for the development of its proprietary technology,
or that, if received, the Company will obtain rights to such technology
sufficient to permit the Company to develop and market new products or to
prevent third parties from using such technology to compete with the Company.

The Company relies substantially on certain technologies that are not
patentable or proprietary and are therefore available to the Company's
competitors. The Company also relies on certain proprietary trade secrets and
know-how that are not patentable. Although the Company has taken steps to
protect its unpatented trade secrets and know-how, in part through the use of
confidentiality agreements with its employees, consultants and certain of its
contractors, there can be no assurance that such agreements will not be
breached, that the Company would have adequate remedies for any breach, or that
the Company's trade secrets will not otherwise become known or be independently
developed or discovered by competitors.

The Company's academic collaborators have certain rights to publish data
and information in which the Company has rights. There is considerable pressure
on academic institutions to publish discoveries in the high technology and
physics fields. There can be no assurance that such publication would not
adversely affect the Company's ability to obtain patent protection for certain
technologies in which the Company may have a commercial interest. See
"Business -- Patents and Proprietary Rights."

LIMITED MICROLASER MANUFACTURING EXPERIENCE; SCALE-UP RISK

The Company has no experience in producing microlasers other than in small
developmental quantities. The Company's microlasers are assembled from component
parts at the Company's San Diego facility. The Company purchases component parts
for its microlasers, including laser crystals, nonlinear crystals and diode
lasers, from various sources around the world. However, none of the Company's
suppliers of microlaser component parts has experience in supplying components
with the Company's specifications at increased volumes. The Company does not
have long term or volume purchase agreements with any of its

7
<PAGE> 10

suppliers and currently purchases components on a purchase order basis. There
can be no assurance that these suppliers will be able to provide components to
the Company in the quantities, with the quality or at the prices necessary for
production quantities of the Company's products under development. The Company
must increase its manufacturing capacity to polish and coat crystals and to
perform the required complex assembly steps. Such an increase in its
manufacturing capacity will require significant scale-up expenditures and
additions to the Company's facilities. See "Use of Proceeds." In the event the
Company is unable to locate sufficient sources of microlaser component parts, or
is unable to expand its manufacturing capacity to produce microlasers and
microlaser based products, the Company will not be able to manufacture its
products on commercially reasonable terms, if at all, which would have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Manufacturing."

LIMITED MICROLASER SALES, MARKETING AND DISTRIBUTION EXPERIENCE

The Company has only limited experience marketing and selling its
microlasers, and does not have experience marketing and selling such products in
commercial quantities. The Company intends to sell its microlasers and
microlaser based products through a direct sales force in North America and a
direct sales force and distributors in Europe. In Asia, the Company intends to
sell its microlasers and microlaser based products primarily through agreements
with distributors or representatives, although the Company has not entered into
any such agreements or arrangements to date. To the extent that the Company
enters into distribution or representation arrangements for the sale of its
microlasers and microlaser based products, the Company will be dependent upon
the efforts of third parties. There can be no assurance that the Company will be
able to build a direct sales force or marketing organization for microlasers or
microlaser based products, that establishing such a direct sales force or
marketing organization will be cost effective, or that the Company's sales and
marketing efforts will be successful. There can be no assurance that the Company
will be able to enter into agreements with distributors or representation
arrangements on a timely basis, if at all, or that such distributors or
representatives will devote adequate resources to selling the Company's
microlasers and microlaser-based products. Failure to build an effective sales
and marketing organization or to establish effective distribution or
representation arrangements for the Company's microlaser products would have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Sales and Marketing."

FUTURE CAPITAL REQUIREMENTS

Although the Company believes that the net proceeds from the sale by the
Company of Common Stock in this offering, together with existing cash balances,
cash flow from operations and available lines of credit, will be sufficient to
meet its capital requirements for at least the next 12 months, the Company may
seek additional equity or debt financing to compete effectively in the markets
it serves. The timing and amount of the Company's capital requirements cannot be
precisely determined at this time and will depend on a number of factors,
including the demand for the Company's products and products under development.
There can be no assurance that such additional financing will be available when
needed, or, if available, will be on terms satisfactory to the Company. If
additional funds are raised by issuing equity securities, further dilution to
the then existing stockholders will result. See "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."

FLUCTUATION IN QUARTERLY PERFORMANCE

The Company has experienced and expects to continue to experience
significant fluctuations in its quarterly results. The Company may incur
significant losses in the future due to product design, development,
manufacturing and marketing expenditures, especially in connection with its
microlasers and microlaser based products. If significant variations were to
occur between forecasts and actual orders with respect to its laser optics
business or microlasers and microlaser based products, the Company may not be
able to reduce its expenses proportionately and in a timely manner, and
operating results could be adversely affected. Such variations have occurred in
the past and could occur again in the future as a result of increases in
development expenditures for proposed new products, product introductions by
competitors, changes in customer ordering

8
<PAGE> 11

patterns and other factors. In addition, the Company's ability to fill orders in
a timely and responsive manner is dependent upon maintaining adequate
manufacturing capacity and significant inventories of raw material and finished
optics for replacement orders. The Company has experienced capacity constraints
in the past which have resulted in delays in order fulfillment and reduced gross
margins. Future delays in order fulfillment could lead to declines in product
sales. If product sales or prices were to decline substantially, inventory
writedowns could occur. Price reductions or increases in material costs could
also have an adverse effect on the Company's business, financial condition and
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Results of Operations."

RISKS ASSOCIATED WITH INTERNATIONAL SALES

International sales accounted for approximately 43%, 45%, 44%, 43% and 48%
of the Company's total revenues in fiscal years 1994, 1995, 1996 and the six
months ended February 29, 1996 and February 28, 1997, respectively, and the
Company expects that international sales will continue to account for a
substantial portion of total revenues. Sales to Europe and the Asia Pacific
region accounted for 25%, 26%, 36%, 25% and 34% and 14%, 14%, 13%, 12% and 10%,
respectively, of the Company's total international sales for fiscal years 1994,
1995, 1996 and the six months ended February 29, 1996 and February 28, 1997,
respectively. The Company may continue to expand its operations outside of the
United States and to enter additional international markets, both of which will
require significant management attention and financial resources. International
sales are subject to inherent risks, including unexpected changes in regulatory
requirements, tariffs and other trade barriers, political and economic
instability in foreign markets, difficulties in staffing and management and
integration of foreign operations, longer payment cycles, greater difficulty in
accounts receivable collection, currency fluctuations and potentially adverse
tax consequences. Since substantially all of the Company's foreign sales are
denominated in U.S. dollars, the Company's products may also become less price
competitive in countries in which local currencies decline in value relative to
the U.S. dollar. The Company's business and operating results may also be
materially and adversely affected by lower sales levels which typically occur
during the summer months and the calendar year end in Europe and certain other
overseas markets. The sales of many of the Company's OEM customers are dependent
on international sales, which increases the Company's exposure to the risks
associated with international sales. See "Management's Discussion and Analysis
of Financial Conditions and Results of Operations," "Business -- Sales and
Marketing" and "-- Competition."

DEPENDENCE ON KEY PERSONNEL

The Company is highly dependent upon the experience and continuing services
of certain scientists, engineers and production and management personnel.
Competition for the services of these personnel is intense, and there can be no
assurance that the Company will be able to retain or attract the personnel
necessary for the Company's success. The loss of the services of the Company's
key personnel would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Employees,"
"Management -- Executive Officers and Directors" and "-- Other Key Employees."

ENVIRONMENTAL, HEALTH AND SAFETY CONCERNS

The Company is subject to a variety of federal, state and local
governmental regulations related to the storage, use and disposal of hazardous
materials used by the Company in connection with the manufacture of laser
optics. Both the governmental regulations and the costs associated with
complying with such regulations are subject to change in the future. There can
be no assurance that any such change will not have a material adverse effect on
the Company's business, financial condition and results of operations. The
Company makes investments in protective equipment, and continually reviews and
monitors process controls, manufacturing procedures and training to minimize the
risks to employees, surrounding communities and the environment due to the
presence and handling of such hazardous materials. The failure to properly
handle such materials could lead to harmful exposure to employees or to the
improper discharge of hazardous materials. Since the Company does not carry
environmental impairment insurance, such a failure could result in a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business -- Environmental, Health and Safety Matters."

9
<PAGE> 12

SHARES ELIGIBLE FOR FUTURE SALE

Future sales of shares by existing security holders could have an adverse
effect on the market price of the Company's Common Stock. Upon completion of
this offering, the Company will have outstanding 6,202,354 shares of Common
Stock. In addition to the 2,400,000 shares sold in this offering, which are
freely tradable, approximately 230,000 shares, which are currently outstanding,
will be eligible for immediate sale on the date of this Prospectus. In addition,
upon the expiration of lock-up agreements, 180 days after the effective date of
the registration statement of which this Prospectus is a part (the "Effective
Date"), an aggregate of approximately 3,570,000 shares will be eligible for sale
subject to compliance in some cases with Rule 144 under the Securities Act of
1933, as amended (the "Securities Act"). Approximately an additional 1,426,000
shares issuable upon exercise or conversion of outstanding vested options,
warrants and Debentures will also be eligible for sale upon expiration of the
lock-up agreements, 180 days after the Effective Date, subject in some cases to
compliance with Rule 144. Commencing one year after the completion of this
offering, Proxima Corporation ("Proxima") and Union Miniere Inc. ("Union
Miniere"), which beneficially own an aggregate of approximately 2,200,000 shares
of Common Stock (including up to 368,888 shares issuable upon conversion of
outstanding Debentures), will be entitled to certain registration rights with
respect to such shares. The exercise of such rights by either Proxima or Union
Miniere could result in a large number of shares being sold in the public market
after one year from the closing of this offering. Future sales of shares by
existing stockholders could have an adverse effect on the market price of the
Common Stock or otherwise impair the Company's ability to raise additional
capital. See "Certain Transactions," "Description of Capital Stock" and "Shares
Eligible for Future Sale."

RIGHTS TO ACQUIRE SHARES

As of the date of this Prospectus, options to purchase 950,290 shares under
the Company's option plans, additional options to purchase 341,329 shares and
warrants to purchase 386,660 shares of Common Stock are outstanding. In
addition, the Debentures will remain outstanding following the offering and will
be convertible into up to 368,888 shares of Common Stock. At the completion of
this offering, the Representatives will receive the Representatives' Warrants to
purchase up to 200,000 shares of Common Stock at an exercise price equal to 130%
of the initial public offering price per share. The Representatives' Warrants
will be exercisable during a period of four years commencing one year from the
date of this Prospectus. During the terms of the outstanding options, warrants,
Debentures and the Representatives' Warrants, the holders are given the
opportunity to profit from a rise in the market price of the Common Stock, and
their exercise or conversion of such options, warrants, Debentures or
Representatives' Warrants will dilute the ownership interest of existing
stockholders, including investors in this offering. The existence of the
options, warrants, Debentures and Representatives' Warrants may adversely affect
the market price of the Common Stock or otherwise impair the Company's ability
to raise additional capital. See "Management -- Stock Option Plans," "Certain
Transactions," "Description of Capital Stock -- Debentures" and "Underwriting."

CONTROL BY EXECUTIVE OFFICERS, DIRECTORS AND AFFILIATED ENTITIES

Upon completion of this offering, the Company's executive officers and
directors and their affiliated entities will, in the aggregate, beneficially own
approximately 56.3% of the outstanding shares of Common Stock. As a result,
these stockholders will be able to exercise control over matters requiring
stockholder approval, including the election of directors, mergers,
consolidations and sales of all or substantially all of the assets of the
Company. This control may prevent or discourage tender offers for the Company's
Common Stock unless the terms are approved by such stockholders. See
"Management" and "Principal and Selling Stockholders."

IMMEDIATE AND SUBSTANTIAL DILUTION

Investors participating in this offering will incur immediate, substantial
dilution of $4.67 per share, assuming an initial public offering price of $7.50
per share. To the extent options or warrants to purchase

10
<PAGE> 13

Common Stock are exercised or the Debentures are converted into Common Stock,
there will be further dilution. See "Dilution" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."

EFFECT OF CERTAIN CHARTER AND BYLAW PROVISIONS

Certain provisions of the Company's Amended and Restated Certificate of
Incorporation (the "Restated Certificate") and Bylaws, including the inability
of stockholders to effect actions by written consent or to remove directors
without cause, may have the effect of making it more difficult for a third party
to acquire, or of discouraging a third party from attempting to acquire, control
of the Company. Such provisions could limit the price that certain investors
might be willing to pay in the future for shares of the Common Stock. Certain
provisions of the Restated Certificate allow the Company to issue Preferred
Stock without any vote or further action by the stockholders. These provisions
may make it more difficult for stockholders to take certain corporate actions
and could have the effect of delaying or preventing a change in control of the
Company. See "Management" and "Description of Capital Stock."

LIMITATION OF LIABILITY AND INDEMNIFICATION

The Restated Certificate limits, to the maximum extent permitted by the
Delaware General Corporation Law ("Delaware Law"), the personal liability of
directors for monetary damages for any breach of fiduciary duty as a director.
The Company's Bylaws provide that the Company shall indemnify its executive
officers and directors and may indemnify its other officers, employees and
agents to the fullest extent permitted by law. The Company will enter into
indemnification agreements with its directors and certain officers containing
provisions which are in some respects broader than the specific indemnification
provisions contained in Delaware Law. The indemnification agreements may require
the Company, among other things, to indemnify such officers and directors
against certain liabilities arising by reason of their status or service as
directors or officers (other than liabilities arising from willful misconduct of
a culpable nature) and to advance their expenses incurred as a result of any
proceeding against them as to which they could be indemnified. The Company has
purchased directors' and officers' liability insurance, however, there can be no
assurance that the Company will be able to obtain such liability insurance in
the future. Section 145 of the Delaware Law provides that a corporation may
indemnify a director, officer, employee or agent made or threatened to be made a
party to an action by reason of the fact that he was a director, officer,
employee or agent of the corporation or was serving at the request of the
corporation against expenses actually and reasonably incurred in connection with
such action if he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the corporation, and, with respect
to any criminal action or proceeding, if he had no reasonable cause to believe
his conduct was unlawful. Delaware Law does not permit a corporation to
eliminate a director's duty of care, and the provisions of the Restated
Certificate have no effect on the availability of equitable remedies, such as
injunction or rescission, for a director's breach of the duty of care. See
"Management -- Limitations of Directors Liability and Indemnification."

NO PRIOR PUBLIC MARKET FOR COMMON STOCK; VOLATILITY OF STOCK PRICE

Prior to this offering, there has been no public market for the Common
Stock, and there can be no assurance that an active public market for the Common
Stock will develop or be sustained after the offering. The initial public
offering price has been determined by negotiations between the Company and the
Representatives. See "Underwriting" for a discussion of the factors to be
considered in determining the initial public offering price. The trading price
of the Common Stock could be subject to significant fluctuations in response to
variations in quarterly operating results, the gain or loss of significant
orders, changes in earning estimates by analysts, announcements of technological
innovations or new products by the Company or its competitors, general
conditions in the laser optics and laser industries and other events or factors.
In addition, the stock market in general has experienced extreme price and
volume fluctuations that have affected the market price for many companies in
industries similar or related to that of the Company and that have been
unrelated to the operating performance of those companies. These market
fluctuations may materially and adversely affect the market price of the Common
Stock.

11
<PAGE> 14

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 2,000,000 shares of
Common Stock offered by the Company hereby at an assumed public offering price
of $7.50 per share, after deducting estimated underwriting discounts and
commissions and initial offering expenses payable by the Company, are estimated
to be approximately $13.0 million (approximately $15.5 million if the
Underwriters' over-allotment option is exercised in full). The Company will not
receive any proceeds of the sale of the shares of Common Stock offered by the
Selling Stockholders.

The Company anticipates that it will use approximately $4.7 million in net
proceeds of this offering for expansion of its manufacturing, research and
administrative facilities and additions to its equipment for production of its
current products, microlasers and microlaser based products under development.
The Company intends to use approximately $1.0 million in net proceeds for
prepayment of its term loan and repayment of amounts outstanding under its line
of credit with Wells Fargo Bank N.A. used for working capital, and approximately
$0.2 million in net proceeds for payment of certain promissory notes issued to
Proxima in connection with the financing of certain equipment used to develop
microlasers. At March 31, 1997, the term loan, the line of credit and the
Proxima promissory notes bore interest at the annual rates of 10.50%, 9.75% and
10.00%, respectively, and have due dates of December 31, 1997, March 1, 1998 and
May 30, 1999, respectively. The Company intends to use the remaining net
proceeds for working capital and general corporate purposes. The Company may use
a portion of the net proceeds to acquire other businesses, products or
technologies; the Company currently has no plans, agreements or commitments,
oral or written, with respect to any such transaction. Pending such uses, the
net proceeds will be invested in interest bearing investment grade securities.
Although the Company believes that the net proceeds from the sale of the Common
Stock in this offering, together with existing cash balances, cash flow from
operations and available lines of credit, will be sufficient to meet its capital
requirements for at least the next 12 months, the Company may be required to
seek additional equity or debt financing. There can be no assurance that such
additional financing will be available when needed, or, if available, will be on
terms satisfactory to the Company.

DIVIDEND POLICY

To date, the Company has not declared nor paid any cash dividends on its
Common Stock. The Company currently intends to retain any future earnings to
finance the growth and development of its business and therefore does not
anticipate paying any cash dividends in the foreseeable future. In addition, the
Company's credit agreement with Wells Fargo Bank prohibits the payment of cash
dividends on its capital stock without the consent of the bank, and the
Debentures restrict payment of cash dividends in accordance with certain
financial covenants. See "Description of Capital Stock -- Convertible
Subordinated Debentures."

12
<PAGE> 15

CAPITALIZATION

The following table sets forth as of February 28, 1997 (i) the actual
capitalization of the Company and (ii) the pro forma capitalization as adjusted
to give effect to the exchange of all outstanding shares of Preferred Stock for
1,193,252 shares of Common Stock and the sale of 2,000,000 shares of Common
Stock offered by the Company hereby at an assumed initial public offering price
of $7.50 per share (after deducting the estimated underwriting discounts and
commissions and offering expenses) and the application of the estimated net
proceeds therefrom.

<TABLE>
<CAPTION>
FEBRUARY 28, 1997
-----------------------
PRO FORMA
ACTUAL AS ADJUSTED
------- -----------
<S> <C> <C>
Short-term debt, including current portion of long-term debt........... $ 1,178 $ 106
======= =======
Long-term debt, net of current portion(1).............................. $ 687 $ 582
Subordinated convertible debentures(1)................................. 1,660 1,660
------- -------
Total long term debt......................................... 2,347 2,242
Stockholders' equity:
Preferred Stock, $0.125 par value, 3,000,000 shares authorized,
1,610,891 shares issued and outstanding actual; $0.001 par value,
3,000,000 shares authorized and no shares issued and outstanding,
pro forma as adjusted............................................. 201 --
Common Stock, $0.001 par value, 15,000,000 shares authorized,
3,009,102 shares issued and outstanding actual; $0.001 par value
15,000,000 shares authorized and 6,202,354 issued and outstanding,
pro forma as
adjusted (2)...................................................... 3 6
Additional paid-in capital........................................... 10,264 23,462
Foreign currency translation adjustment.............................. 6 6
Accumulated deficit.................................................. (4,917) (4,917)
------- -------
Total stockholders' equity........................................ 5,557 18,557
------- -------
Total capitalization......................................... $ 7,904 $20,799
======= =======
</TABLE>

- ---------------
(1) See Note 3 of the Notes to Consolidated Financial Statements for a
description of the Company's long-term obligations and the Debentures.

(2) Excludes: (i) 1,224,953 shares of Common Stock issuable upon exercise of
outstanding options at a weighted average exercise price of $3.92 per share;
(ii) 386,660 shares issuable upon exercise of outstanding warrants at a
weighted average exercise price of $3.21 per share; (iii) 200,000 shares of
Common Stock issuable upon exercise of the Representatives' Warrants at an
exercise price equal to 130% of the initial public offering price per share;
(iv) up to 368,888 shares issuable upon conversion of Debentures; and (v) an
aggregate of 1,250,000 shares reserved for future issuance under the 1997
Plan and the Employee Stock Purchase Plan. See "Management -- Stock Option
Plans," "-- Employee Stock Purchase Plan," "Certain Transactions,"
"Description of Capital Stock" and Note 5 of the Notes to Consolidated
Financial Statements.

13
<PAGE> 16

DILUTION

The pro forma net tangible book value of the Company, as of February 28,
1997, was approximately $4.6 million or $1.09 per share. Pro forma net tangible
book value per share is equal to the Company's total tangible assets less its
total liabilities, divided by the number of outstanding shares of Common Stock,
assuming the exchange of all outstanding shares of Preferred Stock for 1,193,252
shares of Common Stock. After giving effect to the sale of the 2,000,000 shares
of Common Stock offered by the Company hereby (at an assumed initial public
offering price of $7.50 per share and after deducting estimated underwriting
discounts and commissions and offering expenses), the pro forma net tangible
book value of the Company at February 28, 1997 would have been approximately
$17.6 million or $2.83 per share. This represents an immediate increase in such
net tangible book value of $1.74 per share to existing stockholders and an
immediate dilution of $4.67 per share to new investors purchasing shares in this
offering. The following table illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.............................. $7.50
Pro forma net tangible book value per share as of February 28, 1997........ $1.09
Increase per share attributable to this offering........................... 1.74
-----
Pro forma net tangible book value per share after this offering.............. 2.83
-----
Dilution per share to new investors.......................................... $4.67
=====
</TABLE>

The following table summarizes, on a pro forma basis, as of February 28,
1997, the differences between the number of shares purchased from the Company,
assuming the exchange of all outstanding shares of Preferred Stock for Common
Stock, the total consideration paid and the average price paid per share by the
existing holders of Common Stock and by the new investors at an assumed initial
public offering price of $7.50 per share:

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ----------------------- AVERAGE PRICE
NUMBER(1) PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders............... 4,202,354 68% $10,495,000 41% $2.50
New investors....................... 2,000,000 32 15,000,000 59 $7.50
--------- --- ----------- ---
Total..................... 6,202,354 100% $25,495,000 100%
========= === =========== ===
</TABLE>

- ---------------
(1) The sale of 400,000 shares by the Selling Stockholders in this offering will
reduce the number of shares held by existing stockholders to 3,802,354 or
60% of the total shares of Common Stock outstanding and will increase the
number of shares held by new investors to 2,400,000 or 40% of the total
shares of Common Stock outstanding after this offering. See "Principal and
Selling Stockholders."

The foregoing tables excludes: (i) 1,224,953 shares of Common Stock
reserved for issuance upon exercise of outstanding options at a weighted average
exercise price of $3.92 per share; (ii) 386,660 shares of Common Stock issuable
upon exercise of outstanding warrants at a weighted average exercise price of
$3.21 per share; (iii) 200,000 shares of Common Stock issuable upon exercise of
the Representatives' Warrants at an exercise price equal to 130% of the initial
public offering price per share; (iv) up to 368,888 shares issuable upon
conversion of the Debentures; and (v)an aggregate of 1,250,000 shares of the
Common Stock reserved for future issuance under the 1997 Plan and the Employee
Stock Purchase Plan. To the extent that options, warrants or Debentures are
exercised or converted in the future, there will be further dilution to new
stockholders. See "Management -- Stock Option Plans," "-- Employee Stock
Purchase Plan," "Certain Transactions," "Description of Capital Stock" and Note
5 of the Notes to Consolidated Financial Statements.

14
<PAGE> 17

SELECTED CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and the
Notes thereto included elsewhere in this Prospectus. The Consolidated Statements
of Operations Data for the years ended August 31, 1992, 1993, 1994, 1995 and
1996 and the Consolidated Balance Sheets Data as of August 31, 1992, 1993, 1994,
1995 and 1996 are derived from the Company's Consolidated Financial Statements,
which financial statements have been audited by Ernst & Young LLP, independent
auditors. The Consolidated Statements of Operations Data for the six months
ended February 29, 1996 and February 28, 1997 and the Consolidated Balance
Sheets Data as of February 28, 1997, are derived from the unaudited financial
statements of the Company. The results of operations for the six months ended
February 28, 1997 are not necessarily indicative of the results for the full
year or future periods. The unaudited financial statements have been prepared on
a basis consistent with the Company's audited financial statements and include
all adjustments, consisting only of normal recurring adjustments, that
management believed necessary for a fair presentation of the Company's financial
position and results of operations for such periods.

<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR ENDED AUGUST 31, FEBRUARY 29/28,
---------------------------------------------- -----------------
1992 1993 1994 1995 1996 1996 1997
------ ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues:
Product sales............................ $8,622 $ 8,720 $10,158 $11,859 $15,194 $ 6,880 $ 7,995
Contract research and development........ 1,149 963 1,727 2,714 3,713 1,682 3,129
------ ------- ------- ------- ------- ------- -------
Total revenues.................... 9,771 9,683 11,885 14,573 18,907 8,562 11,124
------ ------- ------- ------- ------- ------- -------
Costs and expenses:
Product sales............................ 5,125 5,392 6,550 7,994 9,888 4,601 5,475
Contract research and development........ 941 766 1,308 2,059 2,942 1,262 2,502
Microlaser internal research and
development............................ -- 294 983 2,071 1,968 1,115 99
Other internal research and
development............................ 481 890 585 786 721 346 290
Selling, general and administrative...... 2,739 2,971 3,204 3,583 4,306 2,083 2,278
------ ------- ------- ------- ------- ------- -------
Total costs and expenses.......... 9,286 10,313 12,630 16,493 19,825 9,407 10,644
------ ------- ------- ------- ------- ------- -------
Income (loss) from operations.............. 485 (630) (745) (1,920) (918) (845) 480
Interest expense, net...................... 128 186 268 326 300 152 145
------ ------- ------- ------- ------- ------- -------
Income (loss) before income taxes.......... 357 (816) (1,013) (2,246) (1,218) (997) 335
Income taxes............................... 45 -- -- 23 13 7 22
------ ------- ------- ------- ------- ------- -------
Net income (loss)................. $ 312 $ (816) $(1,013) $(2,269) $(1,231) $(1,004) $ 313
====== ======== ======== ======== ======== ======== ========
Pro forma net income (loss) per share(1)... $ (0.29) $ 0.06
======== ========
Shares used in per share computations(1)... 4,311 4,887
======== ========
OTHER DATA:
Effect of microlaser operations on income
(loss) from operations(2).............. $ -- $ (294) $ (983) $(2,104) $(2,035) $(1,161) $ (164)
====== ======== ======== ======== ======== ======== ========
</TABLE>

<TABLE>
<CAPTION>
AUGUST 31,
---------------------------------------------- FEBRUARY 28,
1992 1993 1994 1995 1996 1997
------ ------- ------- ------- ------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEETS DATA:
Cash and cash equivalents.................. $ 621 $ 109 $ 394 $ 257 $ 298 $ 128
Working capital............................ 2,457 1,745 1,723 2,311 2,838 1,992
Total assets............................... 8,005 7,899 9,444 10,207 11,194 12,728
Long-term debt, net of current portion..... 895 943 1,049 802 559 687
Subordinated convertible debt.............. 1,660 1,660 1,660 1,660 1,660 1,660
Total stockholders' equity................. 3,783 3,234 3,787 4,670 5,320 5,557
</TABLE>

- ---------------

(1) See Note 1 of Notes to Consolidated Financial Statements for a description
of the computation of the pro forma net income (loss) per share and the
number of shares used in the pro forma per share calculation.

15
<PAGE> 18

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following contains forward-looking statements that involve risk and
uncertainties. The Company's actual results may differ materially from the
results discussed. Factors that might cause such a difference include, but are
not limited to, those discussed in "Risk Factors," as well as those discussed
elsewhere in this Prospectus.

OVERVIEW

Laser Power designs, manufactures and sells a broad range of optics and
optical assemblies for lasers used in industrial, medical and military
applications. The Company sells its optics products to major domestic and
foreign laser and laser system manufacturers and end users as original and
replacement components in high power CO2 and other lasers. The Company also
conducts contract research in advanced applications of lasers and optics,
primarily for U.S. government departments and agencies. The Company has also
developed miniature solid state lasers, or microlasers, which it expects to
manufacture, market and sell by the end of fiscal 1997.

The Company manufactures optics primarily for customer orders for scheduled
deliveries and to a lesser extent for inventory for same day delivery orders,
and ships in annual volumes ranging from several units to end user customers to
thousands of units to OEM customers and major distributors. As manufacturing
volume has increased, the Company has experienced longer manufacturing cycle
times due to capacity constraints in its polishing and coating operations. The
Company has recently made investments in additional manufacturing equipment and
facilities in the United States and Mexico that it believes will result in
reduced manufacturing costs when fully integrated into operations. See "Risk
Factors -- Dependence on New Products and Processes" and "-- Fluctuations in
Quarterly Performance."

Contract research and development allows the Company to develop
technologies that the Company believes may have significant commercial
applications without bearing all of the economic risks of such development.
Revenues from contract research are recognized based on the ratio of costs
incurred to total estimated costs. Typically, contract gross margins are lower
than gross margins on product sales. Revenues from contract research are
expected to remain relatively stable in absolute dollar terms and to decrease as
a percentage of revenues due to the higher anticipated growth rate of sales of
optics and the anticipated commencement of sales of microlasers.

Since inception, the Company has been a supplier of optics and research and
development support to various military departments and agencies. Military
product sales were $1.1 million, $0.9 million, $1.5 million, $0.9 million and
$0.6 million for the years ended August 31, 1994, 1995 and 1996 and the six
month periods ended February 29, 1996 and February 28, 1997, respectively.
Military contract research revenues were $1.5 million, $1.9 million, $2.4
million, $1.5 million and $1.5 million for the years ended August 31, 1994, 1995
and 1996 and the six month periods ended February 29, 1996 and February 28,
1997, respectively. Foreign military sales were not material.

A substantial portion of microlaser internal research and development has
been funded by the Company through the sale of equity securities. In the future,
the Company anticipates funding these development activities through funds
provided by operations or research and development contracts.

While optics and contract research operations (excluding interest and
taxes) have been profitable for all periods presented, the investment in
microlaser internal research and development has resulted in consolidated losses
for fiscal 1994, 1995 and 1996. Microlaser research has been primarily funded by
contracts since July 1996. As a result, the Company has operated profitably for
the six months ended February 28, 1997. Continued profitable operations will
depend on the cost of and the time required to complete development and
commercialization of microlasers, pricing and other factors which determine
customer acceptance of these new products, and the success of competing products
and alternative technologies. The carrying value of microlaser assets at
February 28, 1997 was $1.4 million.

16
<PAGE> 19

RESULTS OF OPERATIONS

The following table sets forth certain statements of operations and other
data expressed as a percentage of revenues for the periods indicated.

<TABLE>
<CAPTION>
SIX MONTHS
FISCAL YEAR ENDED AUGUST ENDED
31, FEBRUARY 29/28,
------------------------- ---------------
1994 1995 1996 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues:
Product sales.................................. 85.5% 81.4% 80.4% 80.4% 71.9%
Contract research and development.............. 14.5 18.6 19.6 19.6 28.1
----- ----- ----- ----- -----
Total revenues......................... 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- -----
Costs and expenses:
Cost of product sales(1)....................... 64.5 67.4 65.1 66.9 68.5
Contract research and development(1)........... 75.7 75.9 79.2 75.1 80.0
Microlaser internal research and
development(2).............................. 8.3 14.2 10.4 13.0 0.9
Other internal research and development........ 4.9 5.4 3.8 4.0 2.6
Selling, general and administrative............ 27.0 24.6 22.8 24.3 20.5
Total cost and expenses................ 106.3 113.2 104.9 109.8 95.7
Income(loss) from operations..................... (6.3) (13.2) (4.9) (9.8) 4.3
Interest expense, net............................ 2.2 2.2 1.6 1.8 1.3
Income(loss) before income taxes................. (8.5) (15.4) (6.5) (11.6) 3.0
Income taxes................................... -- 0.2 -- 0.1 0.2
Net income(loss)................................. (8.5) (15.6) (6.5) (11.7) 2.8
OTHER DATA:
Effect of microlaser operations on income
(loss) from operations(3)................... (8.3) (14.4) (10.8) (10.4) (1.9)
</TABLE>

- ---------------
(1) Cost of product sales and cost of contract research and development revenues
are stated as percentages of product sales and contract research and
development revenues, respectively.

(3) The effect of microlaser operations on income (loss) from operations
includes gross margin, research and development expenses and incremental
selling, general and administrative expenses. It does not include any
allocations of corporate expenses, interest or taxes.

Six Months Ended February 28, 1997 Compared to Six Months Ended February 29,
1996

For the six months ended February 28, 1997, product sales were $8.0 million
compared to $6.9 million for the same period in fiscal 1996, an increase of $1.1
million or 16%. Contract research and development revenues were $3.1 million for
the six months ended February 28, 1997 compared to $1.7 million for the same
period in fiscal 1996, an increase of $1.4 million or 86%. The increase in
product sales was due to increased acceptance of the Company's OEM customers'
lower power lasers for certain industrial and medical applications and increased
worldwide demand for laser optics for new high power lasers and as replacement
parts in installed lasers. The increase in contract research and development
revenues was due primarily to work performed on a commercial microlaser display
development contract that began in July 1996.

17
<PAGE> 20

The Company's ability to maintain or improve on the increased product sales
in the first six months for the remainder of fiscal 1997 will depend on
maintaining increased orders for products, integrating into operations
additional manufacturing equipment purchased and facilities leased during the
first six months of fiscal 1997, hiring and training new employees for its
expanded facility in Mexico and commencing planned shipments of microlasers for
medical and other applications. The growth in contract research and development
revenues is expected to slow for the full year because the commercial display
development contract is scheduled to be completed prior to year end.

Gross profit on product sales was $2.5 million for the six months ended
February 28, 1997 compared to $2.3 million for the same period in fiscal 1996,
an increase of $241,000 or 11%. Gross profit on contract research and
development revenues was $627,000 for the six months ended February 28, 1997
compared to $420,000 for the same period in fiscal 1996, an increase of $207,000
or 49%. Gross margin on product sales decreased to 31.5% for the six months
ended February 28, 1997 from 33.1% for the same period in fiscal 1996. The
decrease was primarily due to manufacturing inefficiencies related to capacity
constraints and facility expansion to accommodate the increased volume of orders
and to a lesser extent reduced average selling prices of optics in certain
markets. Gross margin on contract research and development revenues decreased to
20.0% for the six months ended February 28, 1997 from 25.0% for the same period
in fiscal 1996 due to the lower negotiated gross profit on the commercial
display development contract.

Microlaser internal research and development expenses were $99,000 for the
six months ended February 28, 1997, compared to $1.1 million for the same period
in fiscal 1996, a decrease of $1.0 million or 91%. The decrease was due to the
transition of funding for certain microlaser development efforts from internal
sources to contract sources. Microlaser internal research and development
expenses are expected to increase over the last six months of fiscal 1997.

Selling, general and administrative expenses were $2.3 million for the six
months ended February 28, 1997 compared to $2.1 million for the same period in
fiscal 1996, an increase of $194,000 or 9%. These expenses have decreased as a
percentage of revenues as absolute spending has increased at a slower rate than
the growth in revenues.

Income taxes were $22,000 for the six months ended February 28, 1997
compared to $7,000 for the same period in fiscal 1996, an increase of $15,000 or
218%. The increase was due to increased taxable income. The Company's effective
tax rate was reduced substantially by the utilization of federal and state tax
net operating loss carryforwards. The future availability of carryforwards may
be limited by the application of rules relating to a change in control as a
result of this offering.

Fiscal Year Ended August 31, 1996 Compared to Fiscal Year Ended August 31,
1995

Product sales were $15.2 million in fiscal 1996 compared to $11.9 million
in fiscal 1995, an increase of $3.3 million or 28%. Contract research and
development revenues were $3.7 million in fiscal 1996 compared to $2.7 million
in fiscal 1995, an increase of $1.0 million or 37%. The increase in product
sales was due to increased acceptance of the Company's OEM customers' lower
power lasers for certain industrial and medical applications and increased
worldwide demand for laser optics for new high power lasers and as replacement
parts in installed lasers. The increase in contract research and development
revenues was due to the increased number and average size of contracts awarded
to the Company.

Gross profit on product sales was $5.3 million in fiscal 1996 compared to
$3.9 million in fiscal 1995, an increase of $1.4 million or 37%. Gross profit on
contract research and development revenues was $771,000 in fiscal 1996 compared
to $655,000 in fiscal 1995, an increase of $116,000 or 18%. Gross margin on
product sales increased to 34.9% in fiscal 1996 from 32.6% in fiscal 1995. The
increase in gross margin was primarily due to improved manufacturing
efficiencies resulting from higher manufacturing volume and from increased
production in Mexico. Gross margin on contract research and development revenues
decreased to 20.8% in fiscal 1996 from 24.1% in fiscal 1995. The decrease was
primarily due to a cost-sharing contract that

18
<PAGE> 21

supplemented internal funding of technology development for microlasers and
microlaser based projection displays.

Microlaser internal research and development expenses were $2.0 million in
fiscal 1996 compared to $2.1 million in fiscal 1995, a decrease of $103,000 or
5%, due to the transition of certain microlaser development from internal
funding to contract funding late in fiscal 1996.

Selling, general and administrative expenses were $4.3 million in fiscal
1996 compared to $3.6 million in fiscal 1995, an increase of $724,000 or 20%,
due primarily to the addition of personnel necessary to support the growth in
product sales and the anticipated production of microlasers and to a lesser
extent Company-wide bonus accruals; no bonuses were accrued in 1995. These
expenses decreased as a percentage of revenues as absolute spending increased at
a slower rate than the growth in revenues.

Fiscal Year Ended August 31, 1995 Compared to Fiscal Year Ended August 31,
1994

Product sales were $11.9 million in fiscal 1995 compared to $10.2 million
in fiscal 1994, an increase of $1.7 million or 17%. Contract research and
development revenues were $2.7 million in fiscal 1995 compared to $1.7 million
in fiscal 1994, an increase of $1.0 million or 57%. The increase in product
sales was due to increased worldwide demand in both industrial and medical
markets for laser optics for new lasers and as replacement parts in installed
lasers. The increase in contract research and development revenues was due to
the increased number and average size of contracts awarded to the Company.

Gross profit on product sales was $3.9 million in fiscal 1995 compared to
$3.6 million in fiscal 1994, an increase of $257,000 or 7%. Gross profit on
contract research and development revenues was $655,000 in fiscal 1995 compared
to $419,000 in fiscal 1994, an increase of $236,000 or 56%. Gross margin on
product sales decreased to 32.6% in fiscal 1995 from 35.5% in fiscal 1994,
primarily due to competitive pricing pressures. Gross margin on contract
research and development revenues decreased to 24.1% in fiscal 1995 from 24.3%
in fiscal 1994, due to cost increases that were not covered by increased prices.

Microlaser internal research and development expenses were $2.1 million in
fiscal 1995 compared to $1.0 million in fiscal 1994, an increase of $1.1 million
or 111%. Fiscal 1995 expenditures included a full year of development activity
under a joint development agreement with Proxima compared to seven months in
fiscal 1994. Other internal research and development expenses were $786,000 in
fiscal 1995 compared to $585,000 in fiscal 1994, an increase of $201,000 or 34%,
due to increased internal funding of new product development of laser optics and
optical assemblies.

Selling, general and administrative expenses were $3.6 million in fiscal
1995 compared to $3.2 million in fiscal 1994, an increase of $378,000 or 12%,
due to the addition of personnel and related increases in compensation. These
expenses have decreased as a percentage of revenues as absolute spending has
increased at a slower rate than the growth in revenues.

Net interest expense was $326,000 in fiscal 1995 compared to $268,000 in
fiscal 1994, an increase of $58,000 or 22%, due primarily to higher interest
rates on the portion of the Company's debt with interest rates based on the
prime rate.

Income taxes were $23,000 in fiscal 1995 and were for state income taxes.
There were no income taxes in fiscal 1994.

19
<PAGE> 22

QUARTERLY RESULTS

The following table presents certain unaudited consolidated quarterly
financial information for fiscal 1996 and the first two quarters of fiscal 1997.
In the opinion of the Company, this information has been prepared on the same
basis as the audited consolidated financial statements appearing elsewhere in
this Prospectus and includes all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the unaudited quarterly
results set forth herein. Operating results for any quarter are not necessarily
indicative of results for any future period or for a full fiscal year.

<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------------
FISCAL 1996 FISCAL 1997
---------------------------------------- -------------------
NOV. 30, FEB. 29, MAY 31, AUG. 31, NOV. 30, FEB. 28,
1995 1996 1996 1996 1996 1997
-------- -------- ------- -------- -------- --------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Product sales............................... $3,352 $ 3,528 $4,262 $4,052 $4,060 $ 3,935
Contract research and development........... 782 900 980 1,051 1,562 1,567
------ ------ ------ ------ ------ ------
Total revenues...................... 4,134 4,428 5,242 5,103 5,622 5,502
------ ------ ------ ------ ------ ------
Costs and expenses:
Cost of product sales....................... 2,224 2,377 2,879 2,408 2,730 2,745
Contract research and development........... 581 681 769 911 1,315 1,187
Microlaser internal research and development(1)... 477 638 554 299 48 51
Other internal research and development..... 179 167 172 203 152 138
Selling, general and administrative......... 1,039 1,044 1,079 1,144 1,169 1,109
------ ------ ------ ------ ------ ------
Total cost and expenses............. 4,500 4,907 5,453 4,965 5,414 5,230
------ ------ ------ ------ ------ ------
Income (loss) from operations................. (366) (479) (211) 138 208 272
Interest expense, net....................... 70 82 74 74 67 78
------ ------ ------ ------ ------ ------
Income (loss) before income taxes............. (436) (561) (285) 64 141 194
Income taxes.................................. 4 3 3 3 12 10
------ ------ ------ ------ ------ ------
Net income (loss)............................. $ (440) $ (564) $ (288) $ 61 $ 129 $ 184
====== ====== ====== ====== ====== ======
</TABLE>

<TABLE>
<CAPTION>
(AS A PERCENTAGE OF REVENUES)
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Product sales............................... 81.1% 79.7% 81.3 % 79.4% 72.2% 71.5%
Contract research and development........... 18.9 20.3 18.7 20.6 27.8 28.5
------ ------ ------ ------ ------ ------
Total revenues...................... 100.0 100.0 100.0 100.0 100.0 100.0
------ ------ ------ ------ ------ ------
Costs and expenses:
Cost of product sales(2).................... 66.3 67.4 67.6 59.4 67.2 69.8
Contract research and development(2)........ 74.3 75.7 78.5 86.6 84.2 75.8
Microlaser internal research and
development(1)........................... 11.5 14.4 10.6 5.9 0.9 0.9
Other internal research and development..... 4.3 3.8 3.3 4.0 2.7 2.5
Selling, general and administrative......... 25.1 23.6 20.6 22.4 20.8 20.2
Total cost and expenses............. 108.9 110.8 104.0 97.3 96.3 95.1
Income (loss) from operations................. (8.9) (10.8) (4.0) 2.7 3.7 4.9
Interest expense, net....................... 1.7 1.8 1.4 1.5 1.2 1.4
Income (loss) before income taxes............. (10.6) (12.6) (5.4) 1.2 2.5 3.5
Income taxes........................ 0.1 0.1 0.1 -- 0.2 0.2
Net income (loss)............................. (10.7) (12.7) (5.5) 1.2 2.3 3.3
</TABLE>

- ---------------
(1) Prior to fiscal 1997, microlaser research was funded internally primarily
using funds provided through the sale of equity securities.

(2) Cost of product sales and cost of contract research and development revenues
are stated as percentages of product sales and contract research and
development revenues, respectively.

The Company's results of operations may vary significantly from time to
time due to a number of factors, including the timing of receipt of orders from
customers, the timing of new product introductions, variations in product mix,
competitive pricing pressures, the delay between incurring expense to expand
manufacturing

20
<PAGE> 23

capacity and the realization of benefits from the added capacity, and seasonal
and foreign exchange factors related to international sales. See "Risk
Factors -- Fluctuation in Quarterly Performance."

Product sales include high unit price orders for custom optics and coating
and diamond turning services. Shipments of custom orders can cause significant
fluctuations in product sales from quarter to quarter. For example, the results
of operations for the quarter ended May 31, 1996 included unusually high product
sales attributable to custom orders. In addition, actions taken by the Company
to increase capacity in the latter part of the first quarter and throughout the
second quarter of fiscal 1997 restricted the Company's ability to maintain
shipments to keep pace with increased orders. As a result, product sales were
slightly lower in the second quarter of fiscal 1997 when compared to the
preceding three quarters, and the backlog of product orders increased 20% from
the start of the fiscal year to $3.6 million at February 28, 1997. The Company
believes that recent expansion of operations in Mexico and the addition of
polishing and thin film coating equipment will enable it to increase product
shipments to meet customer demand.

In the second quarter of fiscal 1997, gross margin on product sales was
30.2%, compared to an average of 36.7% for the preceding two quarters. The lower
gross margin was due to the impact on ongoing operations of facility expansion
in the United States and Mexico, additional engineering and material costs to
improve manufacturing processes and discounts provided to foreign distributors
to offset the impact of the stronger U.S. dollar.

Based on all of the above factors, as well as factors discussed elsewhere
in this Prospectus, the Company believes that quarter-to-quarter comparisons of
its results of operations and components thereof are not necessarily meaningful
and should not be relied upon as indications of future performance.

LIQUIDITY AND CAPITAL RESOURCES

From inception, the Company has financed operations through cash generated
by operating activities, private placements of debt and equity securities and
bank loans. In 1987, Union Miniere purchased the Debentures and shares of Common
Stock for total consideration of $2.8 million. From May 1993 to June 1996,
Proxima purchased shares of Common Stock and shares of Series A Preferred Stock
for total consideration of $6.7 million.

For the three year period ended August 31, 1996, purchases of capital
equipment and investments in other assets were funded by equity investments and
by long term borrowings. For the six months ended February 28, 1997, purchases
of capital equipment and investments in other assets were funded by available
cash and bank advances that will be converted to a term loan on August 1, 1997.

The Company maintains a $2.0 million secured bank line of credit which had
outstanding borrowings of $774,000 at February 28, 1997. The line of credit
expires on March 1, 1998 and bears interest at the bank's prime rate plus one
percent. The Company intends to use a portion of the net proceeds to the Company
from the offering to repay the outstanding balance on the line of credit. See
"Use of Proceeds."

Substantial additional capital funds will be required to acquire capital
equipment to increase capacity and automate production of laser optics and to
manufacture, assemble and test planned new microlaser products. The Company will
also require funds for facility expansion and investments in working capital and
other assets. The Company anticipates that net proceeds of this offering,
together with existing sources of cash and anticipated funds from operations,
will satisfy the Company's projected working capital and capital expenditure
requirements for at least the next 12 months. The timing and amount of
additional capital requirements depend on a number of factors, including
successful completion of development and commercialization efforts, the cost of
plant, equipment and infrastructure to support manufacturing of products under
development, and the amount of working capital necessary to start-up and
maintain operations supporting new products. There can be no assurance that
additional capital would be available. The lack of such capital would have a
material adverse effect on the Company's business, financial condition and
results of operations.

INFLATION

The Company does not believe that inflation has had a material impact on
its operations or financial results.

21
<PAGE> 24

BUSINESS

Laser Power designs, manufactures and markets high performance laser optics
for industrial, medical and military lasers and laser systems. Laser optics are
precision lenses, reflectors and mirrors used to reflect, collect and focus
laser beams. The Company's products are sold to laser system OEMs and end users
as original and replacement components in high power CO(2) and other lasers. The
Company's core competencies lie in its surface finishings and thin film
coatings, which are key elements involved in all high performance laser optics.
The Company believes that its expertise in these areas provides it with a
significant competitive advantage.

The Company has leveraged its expertise in thin film coatings, surface
finishing and solid-state lasers to develop proprietary miniature solid-state
lasers that are excited or "pumped" by diode lasers. These "microlasers" have
significant size advantages and are generally 100 times more energy efficient
than conventional gas and solid state lasers. Further, they have longer
estimated lifetimes than conventional gas and lamp pumped solid state lasers.
Laser Power shipped the first microlaser evaluation units in March 1997, and
expects to begin commercial deliveries of microlasers to a medical equipment OEM
to replace gas lasers in dermatology systems by the end of fiscal 1997. The
Company believes that microlasers can replace other lasers in additional medical
equipment. The Company is also developing microlasers for projection display and
telecommunications applications.

INDUSTRY AND MARKET OVERVIEW

LASER TECHNOLOGY

The term "laser" is an acronym for "light amplification by the simulated
emission of radiation." A laser converts energy into an intense beam of light
comprised of a single or limited number of wavelengths. A laser beam may be
strong enough to cut sheet metal or may be precise enough to perform eye
surgery. To create a laser beam, an external source of energy, such as
electricity, light or a chemical reaction, is applied to a lasing medium which
becomes excited and emits light. The emitted light is then collected and
directed through or by a series of precision optics to form a laser beam.

The wavelength of the laser beam and therefore its use are determined by
the lasing medium. The most common types of lasing mediums are gases, such as
CO(2) or argon, semiconductor materials, and solid state crystals, such as
yttrium aluminum garnet ("YAG").

The precision optics which collect, form, reflect and transmit the laser
beam are crucial to a laser's function. In gas lasers, the lasing medium is
encased in a tube with precision optics at either end. These internal optics may
direct the beam from one tube to another, may turn the beam back on itself to
further energize the lasing medium or may allow part of the beam to exit the
tube while turning the rest of the beam back on itself. Conventional solid state
lasers are similar except that the tube is replaced by a laser crystal rod. In
addition to the internal optics, a number of external precision optics may be
used to deliver the beam for its intended application. These external optics may
include mirrors, beam splitters, focusing lenses and other special function
optics.

22
<PAGE> 25

intended application. These external optics may include mirrors, beam splitters,
focusing lenses and other special function optics.

High power CO(2) lasers are widely used in industrial applications, such as
welding automobile bodies, scribing delicate ceramic circuits and sheet metal
cutting. CO(2) lasers offer greater quality, speed, flexibility and automation
than conventional cutting and welding technologies. There are an estimated
24,000 CO(2) laser systems currently installed with approximately 3,200
additional systems estimated to be installed in 1997. These systems generally
contain 10 or more optics which must be replaced regularly as they become worn
or contaminated. The Company estimates that in 1997 the market for optics for
use in high power CO(2) lasers will be approximately $60 million, of which $40
million will be sales of optics to replace worn or contaminated optics.

LINE DRAWING OF CO(2) LASER

Lower power CO(2) lasers and argon lasers are used in medical and cosmetic
procedures, including heart surgery and the removal of tattoos and skin
wrinkles. Laser procedures reduce blood loss and post-operative pain compared to
other procedures.

Lasers employing a semiconductor medium (diode lasers) are used in
printers, compact disk players and telecommunications equipment. Diode lasers
can also be used to excite or "pump" solid state lasers. Solid state lasers,
which employ crystals as the lasing medium and are energized by light from
lamps, are used in various industrial, medical and biotechnology applications.
Recently, laser engineers have developed small, highly efficient solid state
lasers that are energized by diode lasers (diode pumped solid state lasers or
"DPSSLs"). Because of their small size and high efficiency, DPSSLs may address
many of the applications currently served by other lasers and may create new
applications. Microlasers are miniature DPSSLs.

23
<PAGE> 26

PRODUCTS AND PRODUCTS UNDER DEVELOPMENT

HIGH PERFORMANCE LASER OPTICS PRODUCTS

The Company produces optics, including total reflectors, output couplers,
beam splitters and lenses, for use in high power industrial, medical, scientific
and military lasers. The Company's expertise in the area of surface finishing
and, in particular, thin film coatings, is critical to producing high
performance laser optics. In general, the performance of an optic is primarily
dependent on the quality of the thin film coating. Thin film coatings include
various reflective coatings for mirrors and transmissive and partially
transmissive coatings for lenses, beam splitters and output couplers. The
Company believes that the high quality of its thin film coatings and its
commitment to customer service enhance its reputation as a supplier of high
power and technically advanced laser optics.

CO(2) Optics. Reliable operation of high power CO(2) lasers requires high
quality, low absorption optical elements. The Company supplies substantially all
types of optics used in CO(2) lasers and laser systems. Such optics fall broadly
into two categories: transmissive zinc selenide and reflective metal optics.

Zinc selenide is the substrate material of choice for high power CO(2)
laser transmissive optics such as lenses, output couplers and beam splitters
because of its low absorption of laser energy. Generally, zinc selenide optics
with low absorption thin film coatings are able to handle up to three kilowatts
of power. As laser power increases to the multi-kilowatt range, reflective metal
optics replace transmissive optics in certain applications.

Reflective metal optics (such as folding mirrors, phase shifting mirrors,
beam bending mirrors and focusing mirrors) utilize a metal substrate, such as
copper. Metal optics are fabricated by conventional polishing or single-point
diamond turning, a process which involves cutting by gem quality diamonds to
create a mirror finish. The Company is a leader in the uses of state-of-the-art,
single-point diamond turning methods to produce both standard metal optics and
those with complicated surfaces such as aspheres, parabolas and hyperbolas,
which are used with higher power CO(2) lasers. The Company's state-of-the-art
fabrication and thin film coating technologies have earned Laser Power a
reputation as a leading manufacturer of zinc selenide and metal optics.

The Company supplies zinc selenide and metal optics to high power CO(2)
laser and laser system manufacturers and to the aftermarket as replacement
parts. The aftermarket portion of the Company's optics business is growing
rapidly as industrial applications of CO(2) lasers proliferate worldwide.
Because CO(2) laser optics wear or become contaminated (average lifetime is
estimated to be 1,000 to 2,000 hours), every new laser installed increases the
market for replacement optics. In order to meet this growing aftermarket demand,
the Company provides same day shipment of critical replacement optics for most
high power CO(2) lasers.

Military Products. Working with Lockheed Martin Corporation ("Lockheed
Martin") and TRW, Inc. ("TRW"), the Company has developed thin film coatings
utilized in ongoing U.S. government programs to develop laser weapons for
missile defense. The Company has developed very low absorption thin film
coatings for uncooled optics, which are critical to a space-based laser for
defense against long range ballistic missiles. By using uncooled optics, the
weight of the laser system is reduced by approximately one-half, allowing the
laser to be boosted into orbit using one rocket instead of two. The Company
continues to develop these coatings for Lockheed Martin. The Company has also
developed coatings for TRW for use in ground-based lasers to defend against
short-range missiles. In addition, the Company has supplied coatings for
uncooled optics to TRW for an airborne laser defense system for use against
shorter range battlefield theater ballistic missiles.

The technology used to produce coatings for these weapons-grade lasers is
derived from technology used by the Company for CO(2) laser optics. The Company
believes that participation in these military programs fosters continued
improvement in CO(2) optics technology and that these improvements provide a
significant competitive advantage.

24
<PAGE> 27

PRODUCTS UNDER DEVELOPMENT

Optics Products

At laser power levels above three kilowatts, zinc selenide loses its
ability to resist distortion and is often replaced by more expensive, beam
quality limiting solutions such as aspheric metal optics or aerodynamic windows.
However, the Company's Turbo-Cooled technology enables zinc selenide optics to
function efficiently even at power levels in excess of 10 kilowatts. In
addition, the Company's MP-5 technology will enhance the performance of zinc
selenide optics because it absorbs 25%-50% less laser energy than many
commercial thin film coatings. Because of its Turbo-Cooled and MP-5
technologies, the Company believes it will continue to be a leading supplier in
CO(2) laser optics as the industrial CO(2) laser industry continues to use
higher laser power.

Turbo-Cooled refers to the Company's patented proprietary cooling design
for optical assemblies. Turbo-Cooled optical assemblies incorporate transmissive
zinc selenide optics that operate with less distortion of the laser beam and at
much higher power levels than conventionally cooled optics. This capacity is
important for the industrial CO(2) laser industry's continual drive for higher
power and better beam quality. The Company has also developed laser output
couplers, focusing systems and beam integrators using this technology.

MP-5 refers to the Company's new class of proprietary low absorption
coatings to replace thorium fluoride based thin film coatings for CO(2) laser
optics. Thorium fluoride, a low-level radioactive material, is used by virtually
every manufacturer of high performance CO(2) laser optics. MP-5 coatings absorb
significantly less laser energy than thorium fluoride based coatings and are
non-radioactive. Low absorption reduces optic heating caused by the laser beam.
Optic heating causes the beam quality to deteriorate which diminishes the
ability of the laser to perform a useful function. In addition, MP-5 technology
will not require the expense of handling, storage and disposal of low level
radioactive wastes associated with thorium fluoride. The Company anticipates
filing a patent application covering the MP-5 technology. The Company believes
that optics manufactured with MP-5 coatings will gain market share and command
premium pricing in certain markets. The Company has performed successful
beta-site testing and expects to release MP-5 products for commercial sale by
the third quarter of fiscal year 1997.

Microlaser Based Products

Recently, the Company has developed microlasers, which are miniature
DPSSLs. The miniaturization is accomplished by reducing the size of the solid
state material to mm or sub-mm dimensions and replacing end mirrors with complex
thin film coatings applied to the polished ends of the laser crystals.
Microlasers have significant size advantages over gas and other lasers in areas
such as medicine, biotechnology and projection displays. In addition,
microlasers are generally 100 times more energy efficient than gas lasers
because they consume less electricity in creating their optical output and
require less cooling. Microlasers also have longer estimated lifetimes than gas
lasers. For example, an argon-ion tube will burnout after 5,000 to 10,000 hours,
compared to an estimated lifetime of 10,000 to 15,000 hours for a microlaser. To
date, revenues from sales of the Company's microlaser products have been
insignificant.

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LINE DRAWING DEPICTING THE DIFFERENCE IN SIZE AND POWER REQUIREMENTS BETWEEN A
MICROLASER AND AN ARGON-ION LASER

Green and Blue Microlasers. The Company's green microlaser has size and
energy efficiency advantages over gas lasers used in certain medical
applications. The Company anticipates manufacturing and selling production
quantities of its green microlaser for use in ophthalmology and dermatology in
the fourth quarter of fiscal 1997.

The Company believes its 0.5 watt blue microlaser is the only high power
all solid state compact blue laser in existence. This laser has a number of
applications in which it can successfully replace argon-ion lasers, such as
certain dentistry, biomedical, dermatology and printing applications.

The Company has developed prototype projectors using its green and blue
microlasers with commercially available red diode lasers to produce high quality
images with color quality equaling color movie film. The Company believes that
its high resolution projector produces higher resolution and more colors than
commercially available liquid crystal projectors. In addition, microlaser based
projectors are smaller than conventional projectors and microlaser light sources
have longer estimated lifetimes compared to conventional light sources.
Conventional light sources have average lifetimes of 500-3,000 hours compared to
an estimated lifetime of 10,000-15,000 hours for microlaser light sources. The
Company expects that microlaser based projectors may also provide advantages in
a number of additional applications, including entertainment

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displays, flight simulators, process and system control room displays, portable
large-venue projectors, videowalls and electronic cinema.

The Company has been awarded several government contracts to develop
advanced multi-beam, direct write microlaser projector technology, for which the
Company retains commercial rights. Such direct write technology will impress
video information directly on the microlaser beams. The beam writes the image
directly onto a screen similar to the way an electron beam writes a television
image, except that multiple lines are written simultaneously, which enables
super high resolution up to 5,000 by 4,000 pixels. The Company has been issued a
U.S. patent covering such technology. Since the beam from red diode lasers is
not suitable for use in direct write projection systems, the Company plans to
develop or acquire a suitable red microlaser to complete development of the
technology. There can be no assurance that the Company will be able to complete
development of a red microlaser, or if it is unable to develop such a
microlaser, that it will be able to acquire the rights to a suitable red laser
technology at a commercially reasonable cost, if at all. If development of
direct write technology can be completed, the Company believes that such
technology may be the best method to produce the colorful super high resolution
images required by electronic cinema.

In addition, the Company currently has a collaborative arrangement with
Laser-Display-Technologic KG ("LDT"), a joint venture between Daimler-Benz AG
and Schneider Rundfunkwerke AG to develop microlasers for a conventional single
beam direct write laser based projection display system. Such systems have been
commercially available using gas lasers for approximately the past 20 years at
very high prices ($200,000 to $500,000). LDT is developing technology which,
when available, and when combined with the Company's microlasers, will enable
compact high resolution projectors to be built with the ultimate aim of
producing high volume, low cost home entertainment systems.

1550 nm Microlaser. Distributed feedback ("DFB") diode lasers emitting at
1550 nm wavelength are used in the telecommunications industry to transmit fiber
optic signals. Such lasers are gaining widespread acceptance in upgrades and new
installations of cable television ("CATV") and other telecommunications systems
worldwide. Microlasers generally create less signal noise and are capable of
generating higher power than DFB lasers. As a result, CATV fiber optic systems
employing 1550 nm microlasers will not require amplification to the same extent
as DFB lasers and will deliver a higher quality, lower noise signal to the
receiver. The Company's 1550 nm microlaser under development employs much of the
same design philosophy and proprietary technology developed for its blue and
green microlasers, especially key aspects which permit scaling to high power.
The Company believes that, if successfully developed, the high output power of a
1550 nm microlaser could eliminate erbium-doped fiber amplifiers ("EDFAs") which
are needed to increase the power of existing DFB lasers in CATV head-ends and
point-to-point transmitters thereby reducing the system costs. The Company
expects to sell its 1550 nm high power microlaser for substantially less than
the typical DFB laser EDFA combination, providing an impetus for industry
adoption of its 1550 nm microlaser in head-end and high power transmitters.

The ability of an EDFA to amplify any wavelength between 1530 nm and 1560
nm provides a cost-effective method of increasing information bandwidth and is
known as dense wavelength division multiplexing ("WDM"). WDM allows multiple
laser beams with different wavelengths to be launched into a single fiber optic
and amplified by a single EDFA. Dense WDM has been rapidly embraced by the
long-haul carriers for digital transmission because of significant cost and time
savings over laying additional fiber optic cable. In addition, the Regional Bell
Operating Companies ("RBOCs") and CATV operators are beginning to use dense WDM
increasingly as the technology advances, cost of equipment decreases and digital
transmission becomes more popular for local traffic. One telecommunications
industry market research firm estimates that the market for dense WDM
transmitters will grow to $1.3 billion in 2000 and $4.3 billion in 2005, a
substantial portion of which will consist of sales of lasers.

The wavelengths used for dense WDM must be precisely controlled. DFB laser
manufacturers are not able to control their semiconductor processes to the level
required to produce precise wavelength devices on demand and therefore existing
manufacturers must go through a selection process to find devices with the
desired wavelengths. Precise temperature control with active feedback is
required to keep the wavelength constant over the lifetime of the device. The
Company's 1550 nm microlaser under development is expected to

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be capable of being tuned to any wavelength over the entire dense WDM band. The
wavelength could be controlled with a low-cost, passive optical element, and all
devices could be manufactured identically, with the desired wavelength selected
with an adjustment of the passive optic element. The Company believes these
characteristics will provide significant advantages for its 1550 nm microlaser
under development in the dense WDM market.

STRATEGY

The Company's strategy is to expand its current precision optics business
and to leverage its core expertise in high performance laser optics, low
absorption thin film coatings and solid-state lasers to become a world leader in
the manufacture, marketing and sale of microlasers and microlaser based
products. Key aspects of the Company's strategy include:

Continue to Grow High Performance CO(2) Laser Optics Business

The Company's core competencies in the design and manufacture of high
performance laser optics, including its advanced super polishing, diamond
turning technologies and thin film coatings have made Laser Power one of the
leading suppliers of such components, especially for high power CO(2) lasers.
The Company's strategy is to continually improve quality and customer service
while lowering production costs and introducing new products, such as the
Company's MP-5 coatings and Turbo-Cooled optics. See "-- Products and Products
under Development." The Company expects the high power CO(2) laser segment to
continue to grow and power levels to continue to rise. As the power of CO(2)
lasers increases, an increasing proportion of optics will be Turbo-Cooled and
metal optics. To meet this increasing demand, the Company will continue to
enhance its Turbo-Cooled and diamond turned metal optics technologies. The
Company believes it is well positioned to meet more stringent requirements for
optics used in higher power CO(2) lasers because of its proprietary and
state-of-the-art technologies.

Expand Markets for High Performance Optics Products

The Company believes that its technologies have applications in markets not
currently served by the Company. The Company has developed a coating technology
for optics used in weapons-grade lasers, which the Company believes is
applicable to the emerging erbium-YAG medical laser optics market as well. The
Company also plans to use its technology base developed for CO(2) laser optics
and microlaser crystal polishing and coating to produce certain optics for
neodymium-YAG lasers, visible lasers and thin film filter coatings for use in
dense WDMs.

In the industrial CO(2) laser market, the Company from time to time designs
solutions to customers' material processing problems with unique
optical-mechanical systems employing the Company's optics and mechanical
components. The Company plans to expand this service in the future to increase
revenues and enhance the Company's technical reputation in the industrial CO(2)
laser market.

Increase Margins on Optics Products

The Company has a multifaceted strategy to reduce costs and increase
margins on its optics products. To reduce costs, the Company plans to increase
automation which will reduce labor costs and improve yields on certain
manufacturing processes. The Company also plans to transfer additional
labor-intensive operations to its facility in Mexico. To increase margins, the
Company plans to intensify its sales efforts on higher margin products such as
Turbo-Cooled optics, and to serve high-performance, high-margin niches in such
markets as the emerging high power neodymium-YAG laser market and the dense WDM
telecommunication market.

Market Microlasers for Existing Industrial and Medical Applications

The Company intends to exploit the superior size and energy efficiency
characteristics of its microlasers to replace existing gas and solid state
lasers currently utilized in certain medical, industrial and other applications.
The Company has recently shipped three prototype green microlasers to a medical
laser OEM

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and negotiated a supply contract under which it expects to begin shipping small
quantities per month prior to fiscal year end 1997.

Develop and Market Microlasers for CATV and Telecommunications Applications

The Company is developing a high power, low noise 1550 nm microlaser that
it believes will provide substantial performance and cost advantages over
certain existing CATV transmission systems that are based on 1550 nm
semiconductor diode DFB lasers and EDFAs. In addition, the ability to tune and
control the microlaser's wavelength at any point over the entire EDFA wavelength
acceptance band will provide advantages over existing lasers used in digital
CATV and telecommunications applications.

Develop and Market Microlasers for High End Projection Display Applications

The Company has developed blue and green microlasers and is developing a
red microlaser, all of which can be arrayed together as the light source for a
high-end display projector. The Company believes that microlaser based
projectors will have significant performance and size advantages over existing
high-end lamp based and CRT based projectors.

Supplement Product Development Activities Through Contract Funding

The Company will opportunistically secure research contracts that will
enhance and advance its products under development. The Company has spent
approximately $9.4 million on microlaser development and related display
technology programs, substantially all of which was paid for through joint
ventures with strategic partners such as the U.S. government, Proxima and LDT.
See "-- Research and Development" and "Certain Transactions."

Expand Capabilities Through Strategic Alliances and Acquisitions

Through alliances with other companies, Laser Power has enhanced its high
performance laser optics technologies, broadened its research activities and
developed its microlaser technology. The Company believes that similar
relationships with leading companies in the medical equipment, high end
projection display and telecommunications industries will facilitate its entry
into those markets. In addition, the Company will continue to acquire
technologies or other companies that complement its current technologies.

SALES AND MARKETING

As of March 31, 1997, Laser Power employed 19 persons in sales and
marketing at sales offices in the U.S. and Belgium. The Company promotes its
optics and intends to promote its microlaser based products to OEM and end-user
customers through a multi-faceted program which includes trade journal
advertising, catalog distribution, direct mail promotion, field sales
presentations, technical seminars, trade show exhibits and direct telemarketing.
The Company sells its optics products through its direct sales force in the U.S.
and Belgium and through its distributors in the rest of the world. The Company
intends to sell its microlaser based products in North America, Europe and Asia
through a direct sales force and distributors.

RESEARCH AND DEVELOPMENT

The Company believes that its future success depends in large part on its
ability to complete products under development, to continue to enhance its
existing products and to develop new products. As of February 28, 1997, the
Company had 54 employees performing research and development in the U.S. and
Belgium. The Company spent $2.9 million, $4.9 million and $5.6 million during
fiscal years 1994, 1995 and 1996, respectively, and $2.7 million and $2.9
million in the six months ended February 29, 1996 and February 28, 1997,
respectively, on research and development. The sources of such funds were
contracts with customers and strategic partners as well as internal Company
funds.

The Company expended $0.6, $0.8 and $0.7 million in fiscal years 1994, 1995
and 1996, respectively, and $0.3 and $0.3 million in the six months ended
February 29, 1996 and February 28, 1997, respectively, or approximately 20%,
16%, 13%, 13%, and 10% of the total research and development funds,
respectively, to

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fund core optical research and development and to increase manufacturing
efficiency. For example, the Company has been developing MP-5, a new class of
proprietary low absorption, non-radioactive coatings for high power CO(2)
lasers. The Company also has developed optics and thin film coatings for lasers
used in the defense industry. Current products under development include low
absorption thin film coatings for non-metal uncooled optics in sizes up to
approximately one-half meter in diameter. If adequate contract funding can be
secured, the Company intends to extend this production technology to produce
thin film coatings for uncooled optics in sizes greater than one meter in
diameter. There can be no assurance that the red microlaser, the 1550 nm
microlaser, MP-5, uncooled optics on the scale required by the military or any
of the Company's products under development will be successfully developed or
commercially available in the future. See "-- Products Under Development" and
"Risk Factors -- Development and other Risks Relating to Microlasers
Technologies."

The Company expended $1.2, $1.9 and $3.7 million in fiscal years 1994, 1995
and 1996, respectively, and $1.9 and $2.3 million in the six months ended
February 29, 1996 and February 28, 1997, respectively, or approximately 43%,
39%, 66%, 71% and 78% of the total research and development funds, respectively,
to fund research and development, for microlasers and microlaser based
projection technology. The Company has developed proprietary technologies which
allow the extraction of large amounts of power out of small laser crystals,
enabling the production of lasers producing more visible power per unit volume
than existing gas or solid-state laser technology. The Company's 0.5 watt blue
microlaser and 3.0 watt green microlaser are the first products to be developed
using these technologies. The Company has been able to leverage its microlaser
technology to secure projection display contracts leading to the development of
proprietary, large screen projection display and head-mounted display
technologies. The Company believes that its development stage 1550nm microlaser
has significant advantages over existing 1550nm laser technology. The Company
expects this microlaser, originally developed under a U.S. Air Force satellite
communications contract, to have broad applications for CATV and long-haul,
head-end and dense WDM fiber-optic telecommunications. Additionally, the Company
has contracts with the U.S. Army, Air Force and Navy to develop microlasers for
various other telecommunication applications.

As of March 31, 1997, the Company had contracts with $2.2 million in future
funding for continued research on various display technologies, including the
continued development of the Company's red microlaser for its projector. The
Company is developing a high resolution multimedia microlaser projector in
partnership with Proxima, under a contract with the U.S. Department of Commerce.
In addition, Laser Power is developing what it believes to be the first digital
color technology to project accurate colors for front and rear projection
systems under a contract with Defense Advanced Research Projects Agency. In July
1996, the Company entered into a collaborative agreement with LDT to develop
microlasers for a development stage projection display system. Additionally, the
Company and Evans and Sutherland Computer Corporation have been funded by the
U.S. Air Force to jointly develop advanced microlaser based projection displays
for advanced military training systems.

MANUFACTURING

The Company manufactures high performance laser optics, microlasers and
related components. Some materials and components are available only from single
suppliers. See "Risk Factors -- Dependence on Sole and Limited Source
Suppliers."

The Company manufactures optics at its San Diego and Mexico facilities.
Thorium fluoride and zinc selenide are important to the manufacture of optics.
The Company purchases all of its thorium fluoride for use in its low absorption
thin film coating processes from Cerac, who the Company believes is the sole
source for high quality thorium fluoride. Any interruption or cessation of
supply by Cerac would have a material adverse effect on the Company's business,
financial condition and results of operations. While the Company is developing
MP-5, an alternate low absorption thin film coating technology, there can be no
assurance that such an alternative can be fully developed. See "Risk
Factors -- Dependence on Sole and Limited Source Suppliers."

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In the case of zinc selenide, a critical raw material in the manufacture of
optics, the Company currently relies exclusively on one supplier, Morton's
Advanced Materials Division. To date, the Company has not experienced any
material difficulties in the quantity or the quality of the zinc selenide
delivered. If any such problem arises in the future, the Company would have to
seek an alternate supplier. However, there can be no assurance that the Company
would be able to secure sufficient inventory of zinc selenide to produce
sufficient product to meet its customers' needs. A transition to alternate
arrangements would involve additional costs and delays in production. See "Risk
Factors -- Dependence on Sole and Limited Source Suppliers."

The manufacture of optics is capital-intensive. Future manufacturing
capacity requirements may require substantial investment in equipment and
facilities. See "Risk Factors -- Fluctuation in Quarterly Performance" and "Use
of Proceeds."

The Company's microlasers are assembled from component parts at the
Company's San Diego facility. The Company purchases component parts for its
microlasers, including laser crystals, nonlinear crystals, and semiconductor
diode lasers, from various sources around the world. The Company believes its
suppliers can supply the components in the quantities, with the quality and at
the prices required by the Company for volume production of microlasers for
medical, dental, telecommunications, industrial, display and other general
applications of the Company's microlaser products under development. However,
none of the Company's suppliers of microlaser component parts has experience in
supplying these components with the Company's specifications at the increased
volumes that the Company needs to achieve its growth goals. The Company does not
have long term or volume purchase agreements with any of its suppliers and
currently purchases components on a purchase order basis. See "Risk
Factors -- Limited Microlaser Manufacturing Experience; Scale-up Risk."

Moreover, the Company has no experience in producing microlasers other than
in small developmental quantities. The Company must increase its manufacturing
capability to polish and coat volume quantities of microlaser and nonlinear
crystals and to perform the required complex assembly steps. Such an increase in
its manufacturing capabilities will require significant scale-up expenditures
and additions to the Company's facilities. See "Risk Factors -- Limited
Microlaser Manufacturing Experience; Scale-Up Risk."

PATENTS AND PROPRIETARY RIGHTS

Laser Power's patent portfolio includes four patents issued by the USPTO
and one patent granted by the European Patent Office (the "EPO"), subsequently
filed in five European countries. The Company has filed eight patent
applications with the USPTO, two patent applications in foreign jurisdictions
and has been granted licenses to two patent applications owned by Proxima and
filed with the USPTO. One of the Company's U.S. patents, issued in November
1996, covers certain aspects of the Company's blue microlaser technology and
another, issued in July 1996, covers the Company's direct write concept and
other aspects of display technology associated with microlasers. One of the
Company's U.S. patents, issued in July 1992, covers basic technology behind the
Company's Turbo-Cooled optic products; the Company's patent granted by the EPO
in April 1993 covers this same technology. Many of the Company's pending patent
applications relate to microlaser technology. The two pending U.S. patent
applications licensed from Proxima cover certain aspects of microlaser display
technology.

Because of lesser protection afforded by and the high cost of pursuing
patents in certain foreign jurisdictions, the Company has elected not to seek
patent protection for certain of its inventions covered by its U.S. patents in
foreign jurisdictions. Nevertheless, the Company intends to selectively pursue
foreign patent filings where the cost of and protection afforded by such
patents, if issued, are justified. However, the Company in general believes
that, in certain cases, obtaining foreign patents may be much less useful than
obtaining domestic patents because of differences in patent laws and costs of
patent enforcement, and further believes that the protection provided by foreign
patents, if obtained, and any other foreign intellectual proprietary protection
may be weaker than that provided domestically.

Laser Power's continued success will depend in part on its ability to
obtain patent protection for its products and processes, and to operate without
infringing the proprietary rights of third parties. There can be no assurance
that patent applications filed by Laser Power will result in patents being
issued, that the claims of

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such patents will offer significant protection of the Company's technology, or
that any patents issued to or licensed by Laser Power will not be challenged,
narrowed, invalidated or circumvented. The Company may also be subject to legal
proceedings that result in the revocation of patent rights previously owned by
or licensed to Laser Power, as a result of which the Company may be required to
obtain licenses from others to continue to develop, test or commercialize its
products. There can be no assurance that Laser Power will be able to obtain such
licenses on acceptable terms, if at all.

In addition, there may be pending or issued patents held by parties not
affiliated with Laser Power that relate to the technology utilized by Laser
Power. As a result, Laser Power may need to acquire licenses to assert
infringement of, or contest the validity of, such patents or other similar
patents which may be issued. Laser Power could incur substantial costs in
defending itself against patent infringement claims, interference proceedings,
opposition proceedings or other challenges to its patent rights made by third
parties, or in bringing such proceedings or enforcing any patent rights of its
own.

The laser optics and laser industries have a history of patent litigation
and will likely to continue to have patent litigation suits concerning laser
technologies. A number of laser optic, laser component and laser manufacturing
companies maintain and continue to develop patent positions that could prevent
Laser Power from using technology covered by these patent positions. However,
the commercial success of the Company depends in part on neither infringing
patents or misappropriating proprietary rights of third parties nor breaching
licenses that may relate to the Company's technologies and products. The patent
positions of laser optic, laser component and laser manufacturing companies,
including the Company, are generally uncertain and involve complex legal and
factual questions. In addition, the Company has received invitations from third
parties to license patents owned by third parties. Any action against the
Company or its collaborative partners claiming damages and seeking to enjoin
commercial activities relating to the affected products and processes could, in
addition to subjecting the Company to potential liability for damages, require
the Company or its collaborative partners to obtain a license in order to
continue to develop, manufacture or market the affected products and processes.
There can be no assurances that the Company or its collaborative partners would
prevail in any such action or that any license (including licenses proposed by
third parties) required would be made available on commercially acceptable
terms, if at all. There are a significant number of United States and foreign
patents and patent applications in the Company's area of interest, and the
Company believes that there may be significant litigation in the industry
regarding patent and other intellectual property rights. If the Company becomes
involved in such litigation, it could consume a substantial portion of the
Company's managerial and financial resources, which could have material adverse
effect on the Company's business, financial condition and results of operations.

The Company has acquired a license to a Stanford owned patent covering
certain technology used in its blue microlaser from ATx Telecom. The Company has
received a letter from a third party claiming that the Company's license was
transferred improperly by Stanford and ATx Telecom. While the Company believes
that such license was properly transferred, there can be no assurance that the
Company's license would not be voided if subjected to a legal challenge. In such
an event, there can be no assurance that the Company would be able to obtain a
replacement license on favorable terms, if at all. Failure to obtain such a
license would result in a material adverse effect to the Company's business,
financial condition and results of operations.

The Company is aware that patents held by other laser companies may relate
to the Company's microlaser technology. The Company does not believe it
infringes on such laser companies' patents or believes that it has adequate
design-arounds if it is held to be infringing. Nevertheless, for certain cost or
strategic reasons, the Company believes it may be advantageous to enter into
license agreements with such laser companies. The Company is currently
negotiating to obtain licenses from such parties for certain technology covered
by such patents. However, there can be no assurance that the Company will obtain
the license(s) on favorable terms, if at all. If it is determined that the
patents held by these other laser companies do cover the Company's technology,
the Company's inability to obtain licenses for such technology could have a
material adverse effect on the Company's business, financial condition and
results of operations.

The Company has developed certain of its proprietary technology pursuant to
development contracts including contracts with federal government agencies.
Under standard provisions in government contracts, the

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government may retain certain rights in technology developed under such
contracts. In addition, the Company has granted significant rights to the other
parties under such contracts. The Company's strategy is to continue to develop a
significant portion of its proprietary technology pursuant to funding received
from development contracts. There can be no assurance that the Company will be
able to continue to obtain funding for the development of its proprietary
technology, or that, if received, the Company will obtain rights to such
technology sufficient to permit the Company to develop and market new products
or to prevent third parties from using such technology to compete with the
Company.

In addition to patent protection, Laser Power also relies on copyright
protection, trade secrets, know-how, continuing technological innovation and
licensing opportunities to expand and bolster its competitive position. In an
effort to maintain the confidentiality and ownership of trade secrets and
proprietary information, the Company requires employees, consultants and certain
collaborators to execute confidentiality and invention assignment agreements
upon commencement of a relationship with the Company. These agreements are
intended to enable the Company to protect its proprietary information by
controlling the disclosure and use of technology to which it has rights and
provide for ownership by the Company of proprietary technology developed at the
Company or with the Company's resources. There can be no assurance, however,
that these agreements will provide meaningful protection for the Company's trade
secrets or other confidential information in the event of unauthorized use or
disclosure of such information or that adequate remedies would exist in the
event of such unauthorized use or disclosure. The loss or exposure of trade
secrets possessed by Laser Power could have a material adverse effect on the
Company's business, financial condition and results of operations. See "Risk
Factors -- Dependence on Patents and Proprietary Rights."

COMPETITION

The industries in which the Company sells its products are highly
competitive. Laser Power's competitive position depends upon a number of
factors, including the price and performance of its products, the level of
customer service, the quality of its manufacturing processes, the compatibility
of its products with existing laser systems and Laser Power's ability to
participate in the growth of emerging technologies, such as microlasers and
their application to industries already served by gas and solid state lasers. In
the optics market, Laser Power primarily competes with II-VI, Inc. ("II-VI"),
Coherent, Inc. ("Coherent") and Sumitomo Electric Industries, Ltd. In the
combined industrial and medical laser optics market, the Company estimates that
it had a 27% market share in 1996, compared to a 50% share held by II-VI for the
same period. In addition, II-VI produces its own supply of zinc selenide. The
Company uses zinc selenide as the substrate for 40% to 50% of the CO(2) laser
optics sold by the Company and purchases this raw material from Morton.

With regard to the Company's microlaser based products under development,
the Company faces competition from gas, solid-state and DFB laser manufacturers
who already service this market as well as from lamp manufacturers who are
developing lamps with extended lives for projection display. Competitive factors
in the market for microlaser applications include price, product performance and
reliability, strong customer support and service, customer relationships and the
breadth of product line. In this market, the Company faces competition from
companies that have substantially greater financial, engineering, research,
development, manufacturing, marketing, service and support resources, greater
name recognition than the Company and long-standing customer relationships.
Specifically, the Company believes that its main competitors for its products
under development will be Spectra-Physics Lasers, Inc., Coherent, Uniphase
Corporation, Lightwave Electronics Corporation, LiCONiX, Omnichrome Corporation
and Edinburgh Instruments Ltd. With respect to CATV 1550 nm microlaser
transmitters for supply to OEMs, the Company believes its competitors will be
Harmonic Lightwaves, Inc., Ortel Corporation, Synchronous Group, Inc., Uniphase
Corporation, SDL, Inc., ATx Telecom, Scientific-Atlanta, Inc., Fujitsu Compound
Semiconductor, Inc., Lucent Technologies Inc. and NORTEL, Ltd. Other CATV
equipment suppliers as well as other laser

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companies who may develop microlaser based products which compete directly with
the Company's microlaser based products may also enter this market.

ENVIRONMENTAL, HEALTH AND SAFETY MATTERS

The Company uses or generates certain hazardous substances in its research
and manufacturing facilities. The Company believes that its handling and
disposal of such substances is in material compliance with applicable local,
state and federal environmental, safety and health regulations at each operating
location. The Company invests substantially in proper protective equipment,
process controls and specialized training to minimize risks to employees,
surrounding communities and the environment due to the presence and handling of
such hazardous substances. The Company conducts monthly workplace monitoring
regarding such substances. When exposure problems or potential problems have
been indicated, corrective actions have been implemented and re-occurrence has
been minimal or non-existent. The Company does not carry environmental
impairment insurance.

The Company uses a low-level radioactive material called thorium fluoride
to manufacture low absorption thin film coatings. The use, storage and disposal
of this material is governed by the State of California which recently inspected
and licensed the Company's facilities and procedures. All thorium fluoride
bearing by-products are collected and stored on site at the Company until
California develops low-level radioactive waste storage capability. The
Company's non-radioactive coating under development, MP-5, will provide superior
performance to certain thorium fluoride coated optics and lessen the
environmental hazards associated with the special use, storage and handling of
the low-level radioactive substance. See "-- Research and Development."

The generation, use, collection, storage and disposal of all other
hazardous by-products resulting from the Company's manufacturing of its products
and research and development of new products, such as suspended solids
containing heavy metals or airborne particulates, are believed by the Company to
be in material compliance with local, state and federal regulations. The Company
believes that it possesses all of the permits and licenses required for
operation. Although the Company is not aware of any material environmental,
safety and health problems in its properties or processes, there can be no
assurance that problems will not develop in the future which would have a
material adverse effect on the Company.

BACKLOG

With the exception of military contracts, most customer orders for optics
are from stock or for deliveries within one to two months. As a result, backlog
of optics orders is typically two to three times monthly sales and was $3.6
million at March 31, 1997, as compared with $2.7 million at March 31, 1996.
Backlog of research contracts fluctuates based on the timing of contract awards
and was $3.4 million at March 31, 1997, as compared with $3.3 million at March
31, 1996. Backlog of microlaser orders is expected to reflect the longer-term
commitments of OEM customers. At March 31, 1997, microlaser backlog was
$673,000, consisting of development funding and the purchase of several
prototype lasers.

EMPLOYEES

As of March 31, 1997, the Company had 189 full time and 4 part time
employees in the U.S. and 37 full time employees in its foreign subsidiaries. Of
the Company's U.S. employees, 14 were engaged in marketing, sales and related
customer-support services, 50 in research and development and 129 in operations,
administration and finance. See "Risk Factors -- Dependence Upon Key Personnel."
None of the Company's employees is represented by a labor union or covered by a
collective bargaining agreement. The Company has not experienced any work
stoppages and considers its relations with its employees to be good.

FACILITIES

The Company's main facilities and headquarters are located in San Diego,
California. These facilities are leased through December 31, 2001 and may be
purchased pursuant to an option which may be exercised at the expiration of the
lease with a purchase price equal to the prevailing market value of the
property. The Company leases approximately 44,000 square feet of space used for
manufacturing, research and administra-

34
<PAGE> 37

tive purposes. The Company also leases facilities in Plymouth, Michigan,
Tijuana, Mexico and Ghent, Belgium, consisting of approximately 1,000, 6,000 and
3,900 square feet, respectively. The lease on the Michigan facility is month to
month and the leases on the Mexico and Belgium facilities expire in September
1998 and December 1999, respectively. The Company believes that its leased
properties are adequately covered by insurance. The Company believes that
following expansion of its manufacturing, research and office space, the
Company's facilities will be adequate for its current and projected needs and
that additional space will be available as needed. See "Risk Factors -- Limited
Microlaser Manufacturing Experience; Scale-up Risk" and "Use of Proceeds."

LEGAL MATTERS

The Company is not a party to any litigation.

35
<PAGE> 38

GLOSSARY OF TERMS

<TABLE>
<S> <C>
ABSORPTION.................... The phenomenon that results when a laser beam travels through
a material (e.g., an optic) and loses some of its energy to
the material through which it passes and heat is generated.
CO(2) LASER................... Lasers which use carbon dioxide as the lasing medium.
DISTRIBUTED FEEDBACK
("DFB") DIODE LASER......... Diode lasers where feedback necessary for laser action is
provided by a diffraction grating incorporated into the
longitudinal structure of the laser rather than mirrors at the
ends of the laser.
DIODE LASER................... Lasers which use a semiconductor diode as the lasing medium.
DIODE-PUMPED SOLID STATE LASER
("DPSSL")................... Solid state lasers which are excited or pumped by a diode
laser.
ERBIUM-DOPED FIBER AMPLIFIER
("EDFA").................... Devices used in fiber optic systems which amplify optical
signals in the wavelength range 1530 to 1560 nanometers.
HEAD-END...................... The hub of a cable television system where signals received by
the community antenna are distributed onto multiple cables to
be transmitted to homes.
HIGH POWER CO(2) LASERS....... Lasers with power output which is high compared with other
lasers used for the same general purposes. For industrial
metal-working purposes, high power generally ranges from 1,000
to greater than 10,000 watts; in wood, plastic and fabric
processing, high power generally ranges from 200 to 800 watts;
and in the medical context, high power is generally 50 watts
of output or greater.
LAMP PUMPED SOLID STATE
LASER....................... Solid state lasers in which the excitation source is a krypton
flash lamp or krypton arc lamp.
LASER OPTICS.................. Optics which are specially designed and manufactured to
transmit and manipulate the unique wavelengths and power of
optical energy associated with a particular type of laser.
MICROLASER.................... Miniature DPSSLs, where miniaturization is accomplished by
reducing the size of the solid state laser crystals to mm or
sub-mm dimensions and replacing end mirrors with complex thin
film coatings applied to the polished ends of the laser
crystals.
NANOMETER ("NM").............. One billionth of a meter.
PIXEL......................... The smallest image-forming unit of a video display.
REFLECTIVE OPTICS............. Optical elements such as total reflectors and beam benders,
which reflect all incident optical energy, neglecting
absorption, from the first optical surface and/or its coating.
SOLID STATE LASER............. Lasers which use a very small quantity of a rare earth element
"doped" (i.e., dissolved) into a solid crystal as the lasing
medium.
THORIUM FLUORIDE.............. Low level radioactive compound used in thin film coatings for
CO(2) laser optics by virtue of its low absorption of CO(2)
laser energy.
TRANSMISSIVE OPTICS........... Optical elements such as windows, lenses and partial mirrors
which allow all or a portion of the incident optical energy,
neglecting absorption, to pass through the entrance surface,
the thickness of the optic and the exit surface.
WAVELENGTH DIVISION
MULTIPLEXING ("WDM")........ The process whereby beams of multiple lasers having different
wavelengths are combined and transmitted simultaneously by a
single fiber optic.
YTTRIUM ALUMINUM GARNET
("YAG")..................... Man made crystals, which, when "doped" (i.e., dissolved) with
small amounts of appropriate rare earth elements such as
neodymium or erbium, are the most common medium for solid
state lasers.
ZINC SELENIDE................. A crystalline solid compound of zinc and selenium used in
CO(2) laser windows, lenses and partial mirrors, because of
its minimal absorption at CO(2) laser wavelengths.
</TABLE>

36
<PAGE> 39

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The executive officers of the Company and directors of the Company
continuing after the offering and their ages are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------- --- ----------------------------------------------------
<S> <C> <C>
Glenn H. Sherman, Ph.D........... 54 Chairman of the Board and Chief Executive Officer
President, Laser Power Research Division, and
Douglas H. Tanimoto, Ph.D........ 57 Director
Richard P. Scherer............... 57 President, Laser Power Optics Division
Dean Hodges, Ph.D................ 53 President, Laser Power Microlasers Division
Arthur P. Minich................. 54 President, Laser Power Display Division
Paul P. Wickman, Jr.............. 47 Senior Vice President and Chief Financial Officer
William G. Fredrick(1)........... 57 Director
Robert G. Klimasewski............ 53 Director
Richard C. Laird(2).............. 50 Director
Kenneth E. Olson(1)(2)........... 60 Director
John C. Stiska(1)(2)............. 55 Director
</TABLE>

- ---------------
(1) Member of the Compensation Committee

(2) Member of the Audit Committee

Glenn H. Sherman, Ph.D., the founder of the Company, has served as Chairman
of the Board and Chief Executive Officer of the Company since 1979. From 1972 to
1979, Dr. Sherman served as a director and Vice President of II-VI, Inc., an
electro-optical component manufacturer. Dr. Sherman received a B.S., M.S. and
Ph.D. in Electrical Engineering from the University of Illinois at Urbana.

Douglas H. Tanimoto, Ph.D. has served as the President of the Laser Power
Research Division since 1988 and has served as a director of the Company since
1984. Dr. Tanimoto served as the President of the Laser Power Optics Division
from 1986 to 1988. Dr. Tanimoto received a B.A. from the University of
California, Berkeley and an M.S. and Ph.D in Physics from the University of
Oregon.

Richard P. Scherer has served as President of the Laser Power Optics
Division since March 1996. Mr. Scherer served as the Company's Senior Vice
President, Marketing and Business Development, of the Company from 1992 to March
1996. Mr. Scherer received a B.S. in Electrical Engineering from Marquette
University.

Dean T. Hodges, Ph.D. has served as President of the Laser Power
Microlasers Division since March 1996. Dr. Hodges served as President of the
Laser Power Optics Division from March 1994 to March 1996. From 1984 to March
1994, Dr. Hodges served as Senior Vice President of Newport Corporation, a
manufacturer of instruments for the laser and optics industries. Dr. Hodges
received a B.S. in mathematics and physics from Humboldt State College and a
Ph.D. in Applied Physics from Cornell University.

Arthur P. Minich, a consultant of the Company, has served as President of
the Laser Power Display Division since December 1996. Mr. Minich has agreed to
become an employee of the Company upon the closing of this offering. From 1992
to November 1996, Mr. Minich served as Chief Technical Officer and Vice
President, Research and Development, of Proxima Corporation, a manufacturer of
computer display projectors. From 1990 to 1992, Mr. Minich founded and served as
Chairman of the Board of Directors of PIVOTAL Corp., a developer of object
oriented business process engineering software. From 1988 to 1990, Mr. Minich
served as the Business Unit/Group General Manager of Eastman Kodak Company's
digital imaging systems business. Mr. Minich received a B.S. in Electrical
Engineering from Iowa State University and an M.S. in Electrical
Engineering/Computer Science from the Hewlett-Packard Honors Cooperative
Program.

Paul P. Wickman, Jr. has served as Senior Vice President and Chief
Financial Officer of the Company since September 1992. From 1983 to 1992, he
served as Group Vice President, Finance, and Controller of The

37
<PAGE> 40

Titan Corporation, a diversified high technology company. Mr. Wickman received a
B.S. in Accounting from San Diego State University and is a Certified Public
Accountant.

William G. Fredrick has served as a director of the Company since 1980. Mr.
Fredrick is the founder and President of Laser Mechanisms, Inc., a laser device
and accessory manufacturer, since 1980, and Oxid Corporation, a laser device and
accessory manufacturer, since 1986. Mr. Fredrick received a B.S. in Engineering
Physics from the University of Michigan.

Robert G. Klimasewski has served as a director of the Company since 1980.
Mr. Klimasewski has been the President and Chief Executive Officer of
Transmation, Inc., an electronic instrumentation manufacturer since 1994. In
1972, Mr. Klimasewski founded Burleigh Instruments, Inc., a scientific
instrument and laser manufacturer, and has been Vice Chairman of Burleigh
Instruments since 1972. Mr. Klimasewski is also a director of Transmation and
Burleigh Instruments. Mr. Klimasewski received a B.S. and M.S. in Optical
Engineering from the University of Rochester.

Richard C. Laird has served as a director of the Company since 1987
representing Union Miniere, s.a., one of the Company's investors. Mr. Laird
joined Union Miniere Inc. in 1980 and currently serves as Executive Vice
President and director. Mr. Laird received a B.S. in Metallurgical Engineering
from Michigan Technological University.

Kenneth E. Olson has served as a director of the Company since October 1994
representing Proxima Corporation. Mr. Olson is Chairman of Board, acting
President and Chief Executive Officer of Proxima. Mr. Olson previously served as
President and Chief Executive Officer of Proxima from December 1990 to January
1996. Mr. Olson is a director of Proxima, Lidak Pharmaceuticals and Applied
Digital Access, Inc. Mr. Olson received an M.B.A. from Pepperdine University.

John C. Stiska has served as a director of the Company since April 1987.
Mr. Stiska served as outside legal counsel to the Company from 1983 to 1990. In
February 1996, Mr. Stiska joined QUALCOMM Incorporated as Corporate Senior Vice
President and has served as General Manager of the Technology Applications
Division since January 1997. From 1990 to January 1996, Mr. Stiska served as
President and Chief Executive Officer of Triton Group Ltd., an operating-holding
company that emerged in 1993 from the Chapter 11 bankruptcy proceedings of
Triton Group Ltd. and Intermark, Inc. Mr. Stiska is a director of Jaymark, Inc.
Mr. Stiska received a B.B.A. and J.D. from the University of Wisconsin.

DIRECTORS NOT CONTINUING AFTER OFFERING

Alain Godefroid, 48, has served as a director of the Company since November
1987. Mr. Godefroid joined Union Miniere, s.a. as General Counsel in 1978 and
currently serves as its Corporate Vice President, Legal and Environmental
Affairs. Mr. Godefroid received an L.L.M. from the University of Texas and a
J.D. from the Universite Libre de Bruxelles, Belgium.

Siegfried Meder, 68, has served as a director of the Company since February
1980. From 1976 until his retirement in 1996, Mr. Meder served as President of
American Schack, Inc., a subsidiary of the Schack Corporation, an engineering
firm specializing in improving the energy efficiency of industrial processes.
Mr. Meder received a Diplom Ingenieur in Chemical Engineering from the Technical
University of Aachen, Germany.

Marc Van Sande, Ph.D., 45, has served as a director of the Company since
July 1993. Since 1993, Dr. Van Sande has served as Business Unit Manager,
Electro Optic Materials, Union Miniere, s.a. From 1989 to 1993, Mr. Van Sande
served as Marketing and Research and Development Manager of the Business Unit
Germanium. Dr. Van Sande received a Ph.D. in Solid State Physics from the
University of Antwerp, Belgium and an Executive Master in Business
Administration from the Institute of Commerce in Antwerp.

OTHER KEY EMPLOYEES

J. Bryan Blasutta, 44, has served as Vice President of North American Sales
of the Laser Power Optics Division since 1995. Prior to 1995, Mr. Blasutta
served in a number of managerial positions at the Company.

38
<PAGE> 41

Mr. Blasutta received a B.A. in Communications from Ohio State University and an
A.A.S. in Laser Electro Optics from Texas State Technical Institute.

Dirk Claeys, 46, has served as Commercial Director of Radius Engineering
N.V., a wholly owned subsidiary of the Company since 1993. From 1990 to 1993,
Mr. Claeys served as Sales Manager of Oerlikon Precision Laser, a Swiss
manufacturer of industrial lasers. Mr. Claeys received a degree in electronics
engineering from the S.T.S. Institute in Ghent, Belgium.

Edward J. Danielewicz, Ph.D., 47, has served as Vice President of
International Sales of the Laser Power Optics Division since 1993. Dr.
Danielewicz has served in a number of managerial positions since joining the
Company in 1981. From 1978 to 1981, Dr. Danielewicz served as Section Leader of
the Lasers and Optics Department of the Aerospace Corporation. Dr. Danielewicz
received a B.S. in Electrical Engineering from the University of Pennsylvania
and a Ph.D. in Electrical Engineering from the University of Illinois at Urbana.

David J. Erickson, 47, has served as Vice President of Engineering and
Manufacturing Technology of the Laser Power Optics Division since May 1996. From
1986 to 1996, Mr. Erickson served as Director of Manufacturing of Optical
Corporation of America.

Graham W. Flint, 59, has served as the Company's Chief Technical Officer
and Vice President of the Laser Power Research Division since 1988. From 1977 to
1988, Mr. Flint served as Director of the Air Force Developmental Optics
Facility managed by Martin Marietta Corporation. Mr. Flint received a B.S. in
Physics from the University of Birmingham, United Kingdom.

David E. Hargis, 32, has served as Vice President of Microlaser Technology
of the Laser Power Research Division since 1994. Mr. Hargis joined the Company
in 1990 as a senior scientist. From 1988 to 1990, Mr. Hargis served as Research
Physicist at Energy Compression Research Corporation. Mr. Hargis received a B.S.
and M.S. in Physics from the University of California, San Diego.

Pedram A. Leilabady, Ph.D., 37, has served as Vice President of
Telecommunications Products of the Laser Power Microlasers Division since March
1997. From 1995 to 1997, he served as Market Operations Manager for Lucent
Technologies Inc. From 1988 to 1995, Dr. Leilabady held a variety of managerial
positions at ATx Telecom Systems, Inc., including Director of Product
Management. Dr. Leilabady received a Ph.D. in Physics from the University of
Kent, United Kingdom.

James D. McFarland, 41, has served as Vice President, General Counsel and
Secretary since August 1996. From 1995 to August 1996, Mr. McFarland practiced
with the law firm of Baker, Maxham, Jester & Meador in San Diego and, from 1991
to 1995, with the firm of Blakely, Sokoloff, Taylor & Zafman in Sunnyvale,
California. Mr. McFarland received a B.A. in Economics from the University of
Florida, a B.S. in Electrical Engineering from the University of California, San
Diego and a J.D. from the University of Florida School of Law.

Peter Muys, 44, has served as the General Manager of Radius Engineering
N.V. since 1990. From 1988 to 1990, Mr. Muys served as Manager of Research and
Development at Eurolaser Technology. Mr. Muys received a University Engineer
degree in Computer Science from the University of Leuven, Belgium and a
University Engineer degree in Physics from the University of Ghent, Belgium.

COMMITTEES OF THE BOARD OF DIRECTORS

The Audit Committee consists of Messrs. Laird, Olson and Stiska. The Audit
Committee makes recommendations to the Board of Directors regarding the
selection of independent auditors, reviews the results and scope of the audit
and other services provided by the Company's independent auditors and reviews
and evaluates the Company's audit and control functions.

The Compensation Committee consists of Messrs. Frederick, Olson and Stiska.
The Compensation Committee makes recommendations regarding the Company's 1997
Plan and Employee Stock Purchase Plan as well as decisions concerning salaries
and incentive compensation for employees and consultants of the Company.

39
<PAGE> 42

DIRECTOR COMPENSATION

The Company's outside directors receive $1,000 per meeting and $500 per
committee meeting as payment for their services as a member of the Board of
Directors and are reimbursed for certain expenses in connection with attendance
at Board and committee meetings. In January 1995, the Company issued a warrant
to purchase 16,666 shares of the Company's Common Stock at an exercise price of
$4.50 per share to Kenneth E. Olson. The warrant may be exercised in whole or in
part at any time by the holder as long as the holder remains a member of the
Board of Directors. The warrant expires in January 2005. In December 1996, the
Company issued warrants to purchase up to 20,000 shares of the Company's Common
Stock to Union Miniere Inc. and warrants to purchase up to 6,666 shares of the
Company's Common Stock to each of John Stiska, Kenneth Olson, Siegfried Meder,
Robert Klimasewski and William Fredrick at an exercise price of $4.50 per share.
Such warrants expire in December 2006. Union Miniere Inc.'s warrant may be
exercised in whole or in part at any time by the holder as long as at least one
representative of the holder remains a member of the Board of Directors.
Following the completion of this offering, non-employee directors will be
eligible to participate in the 1997 Plan. In addition, entities affiliated with
certain of the directors have, from time to time, entered into transactions with
the Company. See "-- Stock Option Plans" and "Certain Transactions."

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

No member of the Compensation Committee of the Company was at any time an
officer or an employee of the Company or serves as a member of the Board of
Directors or Compensation Committee of any entity that has one or more executive
officers serving as a member of the Company's Board of Directors or Compensation
Committee other than Mr. Olson who is a director of Proxima.

40
<PAGE> 43

EXECUTIVE COMPENSATION

The following table sets forth the compensation awarded or paid to, or
earned by, the Company's Chief Executive Officer and the four other most highly
compensated executive officers of the Company who earned in excess of $100,000
in salary and bonus (collectively, the "Named Executive Officers") for services
rendered to the Company during the year ended August 31, 1996:

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
ANNUAL
COMPENSATION(1)
-------------------- ALL OTHER
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY($) BONUS($) COMPENSATION($)(2)
- ------------------------------------------ ----------- ------- -------- ------------------
<S> <C> <C> <C> <C>
Glenn H. Sherman, Ph.D.................... 1996 170,600 25,000 25,600
Chairman of the Board and Chief
Executive Officer

Douglas H. Tanimoto, Ph.D................. 1996 145,500 14,500 19,800
President, Laser Power Research Division
and Director

Dean T. Hodges, Ph.D...................... 1996 140,500 24,000 15,200
President, Laser Power Microlasers
Division

Richard P. Scherer........................ 1996 139,000 18,000 12,300
President, Laser Power Optics Division

Paul P. Wickman........................... 1996 110,400 16,000 13,900
Senior Vice President and Chief
Financial Officer
</TABLE>

- ---------------
(1) In accordance with the rules of the Securities and Exchange Commission, the
compensation described in this table does not include medical, group life
insurance or other benefits received by the Named Executive Officers which
are available generally to all salaried employees of the Company and certain
perquisites and other personal benefits received by the Named Executive
Officers which do not exceed the lesser of $50,000 or 10% of any such
officer's salary and bonus disclosed in this table. There were no long-term
compensation awards granted to the Named Executive Officers during the
fiscal year ended August 31, 1996.

(2) Includes premium payments made by the Company for split dollar life
insurance policies that are owned by Named Executive Officers. The policy
owners have assigned to the Company the proceeds from termination of the
policies or from payment of death benefits in an amount equal to the lesser
of the cash surrender value or the cumulative payments made by the Company
on their behalf. The insurance premium payments in fiscal 1996 amounted to
$23,400, $17,400, $14,800, $12,300 and $11,600 for Messrs. Sherman,
Tanimoto, Hodges, Scherer and Wickman, respectively. Also includes 401(k)
Plan employer matching contributions of $2,200, $2,400, $400, $0 and $2,300
for Messrs. Sherman, Tanimoto, Hodges, Scherer and Wickman, respectively.

STOCK OPTION PLANS

1997 Equity Incentive Plan

In March 1997, the Company adopted the 1997 Plan. The 1997 Plan provides
for incentive stock options for employees (including officers and employee
directors), and nonstatutory stock options, stock bonuses, rights to purchase
restricted stock and stock appreciation rights (either independent of or
appurtenant to an option) for employees (including officers and employee
directors) and non-employee directors and consultants. The 1997 Plan is
administered by the Board of Directors, or a Committee appointed by the Board,
which determines the option awards to be granted, including exercise prices,
number of shares subject to the

41
<PAGE> 44

awards and the exercisability thereof, provided that such terms comply with the
provisions of the plan under which the option award is granted. The Company has
reserved 1,000,000 shares under the 1997 Plan.

The term of the stock options granted under the 1997 Plan may not exceed 10
years. The exercise price of options granted under the 1997 Plan is determined
by the Board of Directors, but in the case of an incentive stock option, cannot
be less than 100% of the fair market value of the Common Stock on the date of
grant, and, in the case of a nonstatutory stock option, cannot be less than 85%
of the fair market value of the Common Stock on the date of grant. Options
granted under the plans vest at the rate specified in the option agreement. No
stock option may be transferred by the optionee other than by will or the laws
of descent or distribution or, in certain limited instances, pursuant to a
domestic relations order, provided that an optionee may designate a beneficiary
who may exercise the option following the optionee's death and provided further
that a nonstatutory option may be transferred to the extent provided in the
nonstatutory option agreement. An optionee whose relationship with the Company
or any related corporation ceases for any reason (other than by death or
permanent and total disability) may exercise options in the three-month period
following such cessation (unless such options terminate sooner or later by their
terms). Options may be exercised for up to twelve months after an optionee's
relationship with the Company and related corporations ceases due to death or
disability (unless such options terminate sooner or later by their terms).

No incentive stock option or award to purchase restricted stock may be
granted to any person who, at the time of the grant, owns (or is deemed to own)
stock representing more than 10% of the total combined voting power of the
Company or any affiliate of the Company, unless the option exercise price is at
least 110% of the fair market value of the stock subject to the option (100% of
the fair market value in the case of restricted stock) on the date of the grant,
and the term of the option does not exceed five years from the date of the
grant. The aggregate fair market value, determined at the time of the grant, of
the shares of Common Stock with respect to which incentive stock options are
exercisable for the first time by an optionee during any calendar year (under
all such plans of the Company and its affiliates) may not exceed $100,000. No
optionee shall be eligible for option grants or stock appreciation rights under
the 1997 Plan covering more than 300,000 shares at such time as Section 162(m)
of the Internal Revenue Code of 1986 as amended (the "Code") becomes applicable
to the 1997 Plan.

Pursuant to the 1997 Plan, shares subject to stock awards that have expired
or otherwise terminated without having been exercised in full again become
available for the grant, but shares subject to exercised stock appreciation
rights will not again become available for the grant. The Board of Directors has
the authority to reprice outstanding options and stock appreciation rights and
to offer optionees and holders of stock appreciation rights the opportunity to
replace outstanding options and stock appreciation rights with new options or
stock appreciation rights for the same or a different number of shares.

Restricted stock purchase awards granted under the plan may be granted
pursuant to a repurchase option in favor of the Company in accordance with a
vesting schedule and at a price determined by the Board of Directors. Restricted
stock purchases must be at a price equal to at least 85% of the stock's fair
market value on the award date, but stock bonuses may be awarded in
consideration of past services without a purchase payment. Rights under a stock
bonus or restricted stock bonus agreement may not be transferred other than by
will, the laws of descent and distribution or a domestic relations order while
the stock awarded pursuant to such an agreement remains subject to the
agreement. Stock appreciation rights granted under the 1997 Plan may be tandem
rights, concurrent rights or independent rights.

Upon certain changes in control of the Company, all outstanding awards
under the 1997 Plan must either be assumed or substituted by the surviving
entity. If the surviving entity determines not to assume or substitute such
awards, then with respect to persons then performing services as employees,
directors or consultants, the time during which such awards may be exercised
shall be accelerated and the awards terminated if not exercised prior to such
change in control. All other awards shall be terminated if not exercised prior
to such event.

As of March 31, 1997, no options were outstanding under the 1997 Plan. The
1997 Plan will become effective upon the effectiveness of the initial public
offering of the Company's Common Stock. The 1997 Plan will terminate in March
2007 unless sooner terminated by the Board of Directors.

42
<PAGE> 45

1981 Stock Option Plan

The Company's Second Amended and Restated 1981 Stock Option Plan (the "1981
Plan") was adopted by the Board of Directors in September 1980, and was
subsequently amended in April 1986 and October 1990. The Board has authorized
and reserved an aggregate of 666,666 shares of Common Stock for issuance under
the 1981 Plan. The 1981 Plan provided for the grant of incentive stock options
under the Code and nonstatutory stock options to employees of the Company.

As of March 31, 1997, the Company had outstanding options to purchase
404,324 shares of Common Stock at a weighted average exercise price of $3.00
under the 1981 Plan. The 1981 Plan has been terminated by the Board of
Directors, and no additional options will be granted thereunder, but outstanding
options remain exercisable and continue to vest until they terminate in
accordance with their terms.

1993 Stock Option Plan

The Company's 1993 Stock Option Plan (the "1993 Plan") was adopted by the
Board of Directors in September, 1993. The Board has authorized and reserved an
aggregate of 666,666 shares of Common Stock for issuance under the 1993 Plan.
The 1993 Plan provided for the grant of incentive stock options to employees and
nonstatutory stock options to employees, directors and consultants of the
Company and its affiliates.

As of March 31, 1997, the Company had granted options to purchase 545,966
shares of Common Stock at a weighted average exercise price of $4.49 under the
1993 Plan. The 1993 Plan has been terminated by the Board of Directors, and no
additional options will be granted thereunder, but outstanding options remain
exercisable and continue to vest until they terminate in accordance with their
terms.

AGGREGATED FISCAL YEAR-END OPTION VALUES

The following table sets forth for each of the Named Executive Officers the
number and value of securities underlying unexercised options and warrants held
by the Named Executive Officers at August 31, 1996.

<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
AUGUST 31, 1996 (#) AUGUST 31, 1996 ($)(1)
------------------------------- ---------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Glenn H. Sherman, Ph.D............... 66,666 10,000 300,000 30,000
Douglas H. Tanimoto, Ph.D............ 200,000 6,666 900,000 20,000
Richard P. Scherer................... 120,000 86,666 540,000 380,000
Dean T. Hodges, Ph.D................. 80,000 126,666 240,000 380,000
Paul P. Wickman...................... 26,666 46,664 110,000 160,000
</TABLE>

- ---------------
(1) Based on the difference between the assumed initial public offering price of
$7.50 per share and the exercise price.

EMPLOYEE STOCK PURCHASE PLAN

In March 1997, the Company adopted the Employee Stock Purchase Plan (the
"Purchase Plan") covering an aggregate of 250,000 shares of Common Stock. The
Purchase Plan is intended to qualify as an employee stock purchase plan within
the meaning of Section 423 of the Code. Under the Purchase Plan, the Board may
authorize participation by eligible employees, including officers, in periodic
offerings following the commencement of the Purchase Plan. The offering period
for any offering may be no more than 27 months. The initial offering under the
Purchase Plan shall commence on the closing of the Company's initial public
offering date of the IPO date and terminate on February 28, 1998. Sequential
six-month offerings will occur thereafter.

Employees are eligible to participate if they are employed by the Company
or a subsidiary of the Company designated by the Board for at least 20 hours per
week and are customarily employed by the Company or a subsidiary of the Company
designated by the Board for at least five months per calendar year.

43
<PAGE> 46

Employees who participate in an offering have up to 15% of their earnings
withheld pursuant to the Purchase Plan. The amount withheld is then used to
purchase shares of the Common Stock on specified dates determined by the Board.
The price of Common Stock purchased under the Purchase Plan will be equal to 85%
of the lower of the fair market value of the Common Stock at the commencement
date of each offering period or the last day of the offering. Employees may end
their participation in the offering at any time during the offering period
except as otherwise provided in the offering. Participation ends automatically
on termination of employment with the Company.

In the event of a merger, reorganization, consolidation or liquidation
involving the Company, the Board has discretion to provide that each right to
purchase Common Stock will be assumed or an equivalent right substituted by the
successor corporation, or the Board may shorten the offering period and provide
for all sums collected by payroll deductions to be applied to purchase stock
immediately prior to such merger or other transaction. The Purchase Plan will
terminate in March 2007. The Board has the authority to amend or terminate the
Purchase Plan, provided, however, that no such action may adversely affect any
outstanding rights to purchase Common Stock.

401(k) PLAN

In September 1988, the Board adopted a tax qualified employee savings and
retirement plan covering the Company's employees, as amended and restated
effective January 1, 1997 (the "401(k) Plan"). Pursuant to the 401(k) Plan,
eligible employees including officers of the Company may elect to reduce their
current compensation by up to the lesser of 16% of such compensation or the
statutorily prescribed annual limit ($9,500 in 1997) and have the amount of such
reduction contributed to the 401(k) Plan. The 401(k) Plan provides for Company
matching and profit sharing contributions of 50% of the employee's contributions
to a maximum of 6% of the employee's compensation. Employees become 20% vested
in the Company's matching contributions after two years of service, and increase
their vested percentages by an additional 20% for each year of service
thereafter. The 401(k) Plan is intended to qualify under Section 401 of the
Code, so that contributions to the 401(k) Plan, and income earned on the 401(k)
Plan contributions, are not taxable to employees until withdrawn from the 401(k)
Plan, and so that contributions by the Company will be deductible by the Company
when made. The trustees under the 401(k) Plan are Glenn H. Sherman and Paul P.
Wickman. The trustees, working with the plan sponsor, Reliastar, at the
discretion of each participant, invest the 401(k) Plan employee salary deferrals
and Company contributions in selected investment options.

EMPLOYMENT AGREEMENTS

The Company has entered into employment agreements, dated April 1, 1997,
with the following executive officers: (1) Glenn Sherman, Ph.D., Chairman of the
Board and Chief Executive Officer, (2) Dean Hodges, Ph.D., President, Laser
Power Microlasers Division, (3) Richard Scherer, President, Laser Power Optics
Division, (4) Douglas Tanimoto, Ph.D., President, Laser Power Research Division,
and (5) Paul Wickman, Jr., Senior Vice President, Treasurer and Chief Financial
Officer. Pursuant to such employment agreements, Messrs. Sherman, Hodges,
Scherer, Tanimoto and Wickman receive annual salaries of $185,000, $145,000,
$147,000, $150,000 and $120,000, respectively. In addition, the Company will
enter into an employment agreement with Arthur Minich, President, Laser Power
Display Division, upon the closing of this offering at an annual salary of
$150,000. Annual bonuses are determined by the Board of Directors. The term of
each employment agreement is three years and may be extended by mutual written
consent of the parties. Each employment agreement also provides that if
employment is terminated for cause or the employee voluntarily resigns, the
employee shall receive only the salary payments earned prior to the date of
termination. If employment is terminated without cause, the employee will
receive consulting fees equal to his base salary times the number of months
equal to the number of years he would have been employed at the next anniversary
date of his employment. As consideration for the consulting fees, the employee
will provide consulting services on an as needed basis. In addition, during the
term of employment, and for as long as the employee is receiving consulting
fees, the employee will not, subject to certain limitations, compete with the
Company.

44
<PAGE> 47

LIMITATION OF LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS

The Company's Bylaws provide that the Company will indemnify its directors
and executive officers and may indemnify its other officers, employees and other
agents to the fullest extent not prohibited by Delaware law as in effect from
time to time. The Company is also empowered under its Bylaws to enter into
indemnification contracts with its directors and officers and to purchase
insurance on behalf of any person it is required or permitted to indemnify.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 (the "Act") may be permitted to directors, officers and controlling persons
of the Company pursuant to the foregoing provisions, or otherwise, the Company
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. Pursuant to this provision, the Company will enter
into indemnification agreements with each of its directors and certain of its
officers.

In addition, the Company's Restated Certificate of Incorporation (the
"Restated Certificate") provides that directors of the Company shall not be
personally liable to the Company or its stockholders for monetary damages for
any breach of fiduciary duty as a director, except for liability (i) for any
breach of the directors' duty of loyalty to the Company or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) in respect of certain unlawful
payments of dividends or unlawful stock repurchases or redemptions as provided
in Section 174 of the Delaware General Corporation Law or (iv) for any
transaction from which the director derives any improper personal benefit. The
Restated Certificate also provides that if the Delaware General Corporation Law
is amended to authorize corporate action further eliminating or limiting the
personal liability of directors, then the liability of the Company's directors
shall be eliminated or limited to the fullest extent permitted by the Delaware
General Corporation Law. The Restated Certificate does not affect a director's
responsibilities under any other law, such as the federal securities laws or
state or federal environmental laws.

45
<PAGE> 48

CERTAIN TRANSACTIONS

In November 1987, Union Miniere, s.a. purchased the Debentures in the
aggregate principal amount of $1,660,000 from the Company. The Debentures are
currently held by Union Miniere Inc. The Debentures bear interest at a rate
which is equal to Wells Fargo Bank's prime rate plus 1%; provided, however, that
the rate of interest shall in no event be less than 5 1/2% per annum nor higher
than the lesser of 11 1/2% per annum or the maximum rate then permitted by law.
The Company has paid interest on the Debentures semi-annually. The Debentures
were originally convertible into Common Stock at $3.00 per share and were due
and payable on October 30, 1992. The original due date has been extended from
time to time; the current due date is October 30, 1997. Union Miniere Inc.
desired to postpone the conversion and/or repayment of the Debentures and in
March 1997, the Company entered into a letter agreement with Union Miniere Inc.
to extend the maturity date of the Debentures to November 2, 2000 and to
increase the conversion price from $3.00 per share to $5.25 per share. In the
event the per share price of this offering is less than $6.75, the conversion
price will be adjusted downward so that for every cent the offering price is
below $6.75 per share, the conversion price will be reduced by one-half of one
cent; provided however, that in no event will the conversion price be reduced
below $4.50 per share. As a result, the maximum number of shares of Common Stock
issuable upon conversion of the Debentures is 368,888. In addition, Union
Miniere Inc. was granted certain registration rights covering all shares of
Common Stock now owned by it or acquired by it upon conversion of the Debentures
and exercise of its warrants, including the right to request that the Company
register the resale of such shares no earlier than one year after the closing of
this offering. In December 1996, the Company issued warrants to purchase 20,000
shares of Common Stock at an exercise price of $4.50 per share to Union Miniere
Inc. in connection with the service of certain directors of the Company. See
"Management -- Director Compensation," "Description of Capital
Stock -- Convertible Subordinated Debentures" and "Shares Eligible for Future
Sale."

On September 1, 1991, the Company acquired substantially all of the assets
of Burleigh Northwest Optical, Inc. In consideration for the assets acquired,
the Company executed a secured promissory note in the amount of $150,000 payable
to Burleigh Instruments, Inc., an entity of which Robert G. Klimasewski is an
officer, director and 50% stockholder. The note bears interest at 8.25% per
annum and is payable in one hundred and twenty equal monthly installments. As of
March 31, 1997, the outstanding balance on such note was $81,487.

In May 1993, Proxima purchased 83,333 shares of Common Stock from the
Company for $250,000. In January 1994, the Company entered into a Stock Purchase
Agreement with Proxima, pursuant to which Proxima has purchased shares of Series
A Preferred Stock for an aggregate purchase price of $6.4 million. The Series A
Preferred Stock could be converted into Common Stock at an effective price of
$6.00 per share. However, under certain circumstances, the effective conversion
price could be reduced to $3.00 per share. In March 1997, to ensure the exchange
of the Series A Preferred Stock for Common Stock, the Company entered into a
letter agreement with Proxima, pursuant to which Proxima will exchange the
Series A Preferred Stock for 1,193,252 shares of Common Stock (a fixed
conversion price of $5.40 per share) immediately prior to the completion of the
offering. In addition, Proxima was granted certain registration rights covering
all shares of Common Stock now owned by it or acquired by it in exchange for the
Series A Preferred Stock, including the right to request that the Company
register the resale of such shares no earlier than one year after the closing of
this offering. In July 1996, Proxima stated that it had written down a majority
of its investment in the Company because the microlaser technology developed by
the Company will initially be suited for the higher cost specialty projector
markets that will not be served by Proxima's products. See "Shares Eligible for
Future Sale."

In January 1994, the Company entered into a Cooperative Development and
License Agreement with Proxima which provides Proxima with certain rights to
display technology developed by the Company so long as Proxima continues to
provide funding to the Company or aggressively markets products using such
technology. Proxima has a right of first refusal regarding certain other
technologies developed by the Company relating to the video display market.

In June 1994, Proxima Corporation extended to the Company a $500,000 line
of credit to finance the purchase of equipment to support microlaser
development. In May 1995, the outstanding balance under the

46
<PAGE> 49

line of credit was converted into a term note due and payable May 30, 1999. As
of February 28, 1997, $218,000 principal amount was outstanding on the note. The
note bears interest at Imperial Bank's prime rate plus 1 1/2%. Principal and
interest payments under the note are due monthly. The amount owing under the
note has been guaranteed by Glenn H. Sherman, the Company's Chairman of the
Board and Chief Executive Officer. The Company intends to repay the outstanding
principal balance and any outstanding accrued interest upon the closing of this
offering.

The Company purchases a number of products for resale from Laser
Mechanisms, Inc. ("LMI"). William G. Fredrick, Jr., a director of the Company,
is the founder, president and sole stockholder of LMI. In addition, LMI
purchases laser optics from the Company. LMI's sales to the Company in fiscal
1994, 1995, 1996, the first six months of fiscal 1997 and the first six months
of fiscal 1996 were $204,000, $631,000, $737,000, $342,000 and $376,000,
respectively. The Company's sales to LMI in fiscal 1994, 1995, 1996 and the
first six months of fiscal 1997 were $205,000, $233,000, $203,000, $96,000 and
$200,000, respectively. The Company believes that such transactions between the
Company and LMI are on terms as favorable to the Company as such terms would
have been if negotiated between the Company and unaffiliated persons.

In December 1996, the Company issued an option to purchase 200,000 shares
of the Company's Common Stock at an exercise price of $4.50 per share to Arthur
P. Minich. The option vests over five years and may be exercised at any time
until its expiration in December 2006.

In April 1996, the Company entered into employment agreements with each of
Glenn H. Sherman, Dean T. Hodges, Richard P. Scherer, Douglas H. Tanimoto and
Paul P. Wickman, Jr. See "Management -- Employment Agreements."

In addition, the Company will, prior to the closing of this offering, enter
into indemnification agreements with each of its directors and certain of its
officers. See "Management -- Limitation of Liability and Indemnification
Matters."

47
<PAGE> 50

PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth certain information with respect to the
beneficial ownership of the Common Stock as of March 31, 1997, and as adjusted
to reflect the sale of this offering, by (i) each person who is known by the
Company to own beneficially more that 5% of the Company's outstanding Common
Stock, (ii) each Named Executive Officer, (iii) each of the Company's directors,
(iv) all current directors and executive officers as a group, and (v) each
Selling Stockholder. Except as indicated in the footnotes to this table, the
persons named in the table have sole voting and investment power with respect to
all shares of Common Stock shown as beneficially owned by them, subject to
community property laws where applicable.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
DIRECTORS, OFFERING(1) OFFERING(1)
EXECUTIVE OFFICERS ------------------- SHARES -------------------
AND 5% STOCKHOLDERS NUMBER PERCENT BEING OFFERED NUMBER PERCENT
- ------------------------------------------------------- ---------- ------- -------------- ---------- -------
<S> <C> <C> <C> <C> <C>
Proxima Corporation(2)................................. 1,276,585 30.4% -- 1,276,585 20.6%
9440 Carroll Park
San Diego, CA 92121-2298
Union Miniere Inc.(3).................................. 924,683 19.9 -- 924,683 13.9
13847 West Virginia Dr.
Lakewood, CO 80228
Glenn H. Sherman, Ph.D.(4)............................. 629,082 14.7 -- 629,082 10.0
Laser Power Corporation
12777 High Bluff Road
San Diego, CA 92130
William G. Fredrick, Jr.(5)............................ 372,122 8.8 -- 372,122 6.0
Laser Mechanisms, Inc.
P.O. Box 2064
Southfield, MI 48037
Douglas H. Tanimoto, Ph.D.(6).......................... 283,933 6.4 -- 283,933 4.4
Laser Power Corporation
12777 High Bluff Road
San Diego, CA 92130
Dean T. Hodges, Ph.D.(7)............................... 121,333 2.8 -- 121,333 1.9
Richard P. Scherer(8).................................. 161,333 3.7 -- 161,333 2.5
Arthur P. Minich....................................... -- -- -- -- --
Paul P. Wickman, Jr.(9)................................ 46,676 1.1 -- 46,676 *
Robert G. Klimasewski(10).............................. 69,491 1.6 -- 69,491 1.1
Richard C. Laird(11)................................... 4,465 * -- 4,465 *
Kenneth E. Olson(12)................................... 25,798 * -- 25,798 *
John C. Stiska(13)..................................... 126,564 3.0 -- 126,564 2.0
Alain Godefroid(14).................................... -- -- -- -- --
Siegfried Meder(15).................................... 93,469 2.2 -- 93,469 1.5
Marc Van Sande, Ph.D................................... -- -- -- -- --
All directors and executive officers as a group (14
persons)(16)......................................... 4,135,534 77.3 -- 4,135,534 56.3
SELLING STOCKHOLDERS
Milton M.T. & Rosalind Pao Chang....................... 197,594 4.7 63,880 133,714 2.2
Tony & Lily Hsu Family Trust dated 11/8/89............. 81,350 1.9 23,635 57,715 *
Other selling stockholders(17)......................... 411,530 9.8 312,485 99,045 1.6
</TABLE>

- ---------------
* Represents beneficial ownership of less than 1%.

(1) Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes voting or investment power with respect
to securities. Except as indicated by footnote, and subject to community
property laws where applicable, the persons named in the table above have
sole voting and investment power with respect to all shares of Common Stock
shown as beneficially owned by them. Percentage of beneficial ownership is
based on

48
<PAGE> 51

4,202,354 shares of Common Stock outstanding as of March 31, 1997 assuming
the issuance of 1,193,252 shares of Common Stock in exchange for the
outstanding Series A Preferred Stock and 6,202,354 shares of Common Stock
outstanding after completion of this offering.

(2) Mr. Olson, a director of the Company, is Chairman of the Board and acting
President and Chief Executive officer of Proxima Corporation.

(3) Includes 368,888 shares subject to convertible debentures and 70,000 shares
subject to warrants exercisable within 60 days of March 31, 1997. Union
Miniere, s.a., a Belgium public company, owns approximately 75% of the
shares of Union Miniere Inc. Sogem, s.a., owns the remaining shares of
Union Miniere Inc. Union Miniere, s.a., owns virtually all the shares of
Sogem, s.a.

(4) Includes 82 shares held by Inamaria Sherman, wife of Mr. Sherman and 68,666
shares subject to options exercisable within 60 days of March 31, 1997.

(5) Includes 10,666 shares held of record by Laser Mechanisms, Inc., of which
Mr. Fredrick is the President, and 23,332 shares subject to warrants
exercisable within 60 days of March 31, 1997.

(6) Includes 201,333 shares subject to options exercisable within 60 days of
March 31, 1997.

(7) Includes 121,333 shares subject to options exercisable within 60 days of
March 31, 1997.

(8) Includes 1,333 shares subject to options exercisable within 60 days of
March 31, 1997 and 160,000 shares subject to a warrant exercisable within
60 days of March 31, 1997.

(9) Includes 41,332 shares subject to options exercisable within 60 days of
March 31, 1997.

(10) Includes 23,332 shares subject to warrants exercisable within 60 days of
March 31, 1997.

(11) Mr. Laird, a director of the Company, is Executive Vice President and a
director of Union Miniere Inc.

(12) Includes 23,332 shares subject to warrants exercisable within 60 days of
March 31, 1997. Excludes 1,276,585 shares held by Proxima Corporation, of
which Mr. Olson is Chairman of the Board and acting President and Chief
Executive Officer.

(13) Includes 23,332 shares subject to warrants exercisable within 60 days of
March 31, 1997.

(14) Excludes 924,683 shares held of record by Union Miniere Inc., of which Mr.
Godefroid is the Corporate Vice President, Legal and Environmental Affairs.

(15) Includes 23,332 shares subject to warrants exercisable within 60 days of
March 31, 1997.

(16) Includes 433,970 shares issuable upon exercise of options exercisable
within 60 days of March 31, 1997, and 276,660 shares issuable upon exercise
of warrants exercisable within 60 days of March 31, 1997. Includes
1,276,585 shares held by Proxima Corporation, of which Mr. Olson is
Chairman of the Board and acting President and Chief Executive Officer; Mr.
Olson disclaims beneficial ownership of such shares. Also includes 924,683
shares held by Union Miniere Inc., of which Mr. Godefroid is the Corporate
Vice President, Legal and Environmental Affairs; Mr. Godefroid disclaims
beneficial ownership of such shares. See footnote 3.

(17) Includes stockholders each of whom owned less than 1% of the Company's
Common Stock prior to the offering and will own less than 1% of the
Company's Common Stock following the offering. Such stockholders (and the
number of shares to be sold by such stockholders in the offering) include:
Sodero R. Arcia (704 shares); Scott Arrington (6,382 shares); Allan R.
Beach, Trustee UDT Floyd Earl Roe Family Trust (481 shares); Andreas Caine
(2,555 shares); Angela G. Caine (1,591 shares); John C. and Isolde M. Caine
(3,194 shares); Hilary K. H. and Marie Louise Chan (1,878 shares); The
Chicago Corporation (2,555 shares); Daniel Combs (638 shares); Verne R.
Costich (3,833 shares); H. Eugene Davis (32 shares); Jacques DeFrenne (399
shares); 1480 Associates (33,499 shares); Stephen Fry (9,582 shares);
Fulton Street Travel (13 shares); James R. Goode (7,666 shares); Sally A.
Goode (6,671 shares); Harris Bank Winnetka (15,647 shares); Glen C. and
John C. Harris, Successor Trustees, Residual Trust B. David J. Harris Trust
dated 4/4/76 (1,625 shares); Alan D. Hiura (10,144 shares); Hiura and Hiura
DDS Inc. (Pension Trust) (9,582 shares); Ronald Hiura (958 shares); Thomas
W. and Sharon E. James (4,632 shares); Claude D. Jones (2,583 shares);
Anthony L. and Rita J. Kendziorski (638 shares); Dennis Kendziorski (3,268
shares); Ervin Kendziorski (7,611 shares); Richard Keyzer (8,103 shares);
Clifford Kidney (81 shares); James A. King (207 shares); Allan Koljonen,
Trustee of the Allan Koljonen Trust (4,120 shares); Roland N. Kumagai DDS
Target Benefit Plan (5,511 shares); Micky Lee (399 shares); Ronald
MacFarlane (255 shares); Karen Matic Trustee, Gregory P. Matic Gift Trust
U/A 7/29/82 FBO Claire Matic (2,555 shares); Karen Matic Trustee, Gregory
P. Matic Gift Trust U/A 7/29/82 FBO Lauren Matic (1,916 shares); Karen
Matic Trustee, Gregory P. Matic Gift Trust U/A 7/29/82 FBO Steven Matic
(1,916 shares); John W. Matthews (3,194 shares); William G. May (6,822
shares); Maura Robbins, Trustee of the Maura Robbins Living Trust dated
12/31/82 (319 shares); Phillip E. Rollhaus (15,431 shares); L. E. and
Denise Rund (420 shares); Horst Sasse (4,791 shares); Michael A. Schneider
(638 shares); Nikom Shomglin (213 shares); Walter K. Silbert (2,678
shares); George R. and Janet Lee Snyder (1,782 shares); Robert Spiegler (32
shares); Bruce Sunderland (958 shares); Lee Sutter (1,916 shares); Gary
Takessian (2,555 shares); Nora Jean and George Thorwood (319 shares); W.
Peter Williams (511 shares); Clifford L. Willis (3,194 shares); Thomas S.
Wilson (38,521 shares); C. Paige Wilson Gift Trust U/A/D 3/18/87, Arlington
Guenther, Trustee (8,304 shares); Kathryn J. Wilson Gift Trust U/A/D
3/18/87, Arlington Guenther, Trustee (8,304 shares); William P. Wilson
(38,328 shares); Gary L. Wirt (9,837 shares).

49
<PAGE> 52

DESCRIPTION OF CAPITAL STOCK

The authorized capital stock of the Company consists of 15,000,000 shares
of Common Stock, $0.001 par value, and 3,000,000 shares of Preferred Stock,
$0.001 par value.

COMMON STOCK

As of March 31, 1997, there were 3,009,102 shares of Common Stock
outstanding held of record by approximately 182 stockholders. The holders of
Common Stock are entitled to one vote per share on all matters to be voted on by
the stockholders. Subject to preferences that may be applicable to outstanding
shares of Preferred Stock, if any, the holders of Common Stock are entitled to
receive ratably such dividends as may be declared from time to time by the Board
of Directors out of funds legally available therefor. In the event of a
liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to share ratably in all assets remaining after payment of
liabilities, subject to prior liquidation rights of Preferred Stock, if any,
then outstanding. The Common Stock has no preemptive, conversion, subscription
or other such rights. There are no redemption or sinking fund provisions
applicable to the Common Stock. All outstanding shares of Common Stock are fully
paid and nonassessable, and the shares of Common Stock to be sold in this
offering will be fully paid and non-assessable.

PREFERRED STOCK

Immediately prior to the closing of this offering, all outstanding shares
of Series A Preferred Stock will be exchanged for 1,193,252 shares of Common
Stock. See Note 5 of Notes to Consolidated Financial Statements for a
description of the outstanding Series A Preferred Stock and "Certain
Transactions."

Under the Restated Certificate, the Board of Directors has the authority to
issue up to 3,000,000 shares of Preferred Stock in one or more series and to fix
the rights, preferences, privileges, and restrictions granted to or imposed upon
such Preferred Stock, including dividend rights, conversion rights, terms of
redemption, liquidation preference, sinking fund terms and the number of shares
constituting any series or the designation of such series, without any further
vote or action by the stockholders. The Board of Directors, without stockholder
approval, can issue additional Preferred Stock with voting and conversion rights
which could adversely affect the voting power of the holders of Common Stock.
The issuance of Preferred Stock could have the effect of delaying, deferring or
preventing a change in control of the Company. The Company has no present plan
to issue any shares of Preferred Stock.

DEBENTURES

Union Miniere Inc. is the holder of the Debentures in the aggregate
principal amount of $1,660,000 from the Company. The Debentures bear interest at
a rate which is equal to Wells Fargo Bank's prime rate plus 1%; provided,
however, that the rate of interest shall in no event be less than 5 1/2% per
annum nor higher than the lesser of 11 1/2% per annum or the maximum rate then
permitted by law. The Debentures are subordinate to all bank debt, limit the
aggregate amount of debt the Company can incur, require that the Company
maintain minimum tangible net worth levels (which vary with the number of
outstanding shares) and require that the Company maintain an average annual cash
flow coverage ratio of 1:1. The Debentures also provide that the Company may
declare dividends only if it meets a minimum average cash flow coverage ratio of
2-to-1. The Debentures were originally due and payable on October 30, 1992,
which maturity date was extended to October 30, 1997. In March 1997, the Company
entered into a letter agreement with Union Miniere Inc. to extend the maturity
date of the Debentures to November 2, 2000 and to adjust the conversion price to
$5.25 per share. In the event the per share price of this offering is less than
$6.75, the conversion price will be adjusted downward so that for every cent the
offering price is below $6.75 per share, the conversion price will be reduced by
one-half of one cent; provided however, that in no event will such conversion
price be reduced below $4.50 per share. As a result, the maximum number of
shares of Common Stock issuable upon conversion of the Debentures is 368,888.
See "Certain Transactions."

50
<PAGE> 53

WARRANTS

As of March 31, 1997, there were warrants outstanding to purchase an
aggregate of 386,660 shares of Common Stock at a weighted average exercise price
of $3.21 per share.

REPRESENTATIVES' WARRANTS

The Company has also agreed to sell to the Representatives warrants to
purchase up to 200,000 shares of Common Stock at a price of $.001 per warrant.
The Representatives' Warrants will be exercisable for a period of four years,
commencing one year after the date of this prospectus, at an initial per share
exercise price equal to 130% of the price to the public set forth on the cover
page of this prospectus. The Representatives' Warrants are not redeemable by the
Company under any circumstances. Neither the Representatives' Warrants nor the
shares of Common Stock issuable upon exercise thereof may be transferred,
assigned or hypothecated until one year from the date of this Prospectus, except
that they may be assigned, in whole or in part, to any successor, officer,
director, member or partner of the Representatives.

The holders of the Representatives' Warrants will have no voting, dividend
or other rights as stockholders of the Company unless and until the exercise of
the Representatives' Warrants. The number of securities deliverable upon any
exercise of the Representatives' Warrants or its underlying securities and the
exercise price of the Representatives' Warrants are subject to adjustment to
protect against any dilution upon the occurrence of certain events, including
issuance of stock dividends, stock splits, subdivision or combination of
outstanding stock and reclassification of stock.

The Company has agreed with the Representatives that if, during the
four-year period commencing one year following the date of this Prospectus, the
Company registers any of its Common Stock for sale pursuant to a registration
statement (with the exception of Form S-4, Form S-8 or other inappropriate
form), it will use its best efforts, upon request of any of the holders of the
Representatives' Warrants and/or the underlying shares, to include such
securities as a part of the registration statement. The Company will bear all
the costs, except underwriting discounts and the Representatives' legal fees,
for one "piggy-back" registration.

DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS

The Company is governed by the provisions of Section 203 of the Delaware
Law. In general, Section 203 prohibits a public Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved in
a prescribed manner. A "business combination" includes mergers, asset sales or
other transactions resulting in a financial benefit to the stockholder. An
"interested stockholder" is a person who, together with affiliates and
associates, owns (or within the preceding three years, did own) 15% or more of
the corporation's voting stock. The statute could have the effect of delaying,
deferring or preventing a change in control of the Company.

The Restated Certificate and Bylaws also require that, effective upon the
closing of this offering, any action required or permitted to be taken by
stockholders of the Company must be effected at a duly called annual or special
meeting of the stockholders and may not be effected by a consent in writing in
lieu of meeting. In addition, special meetings of the stockholders of the
Company may be called only by the Board of Directors, the Chairman of the Board,
the Chief Executive Officer of the Company or by the holders of shares entitled
to cast not less than 10% of the votes at such meeting. The Restated Certificate
also specifies that the authorized number of directors may be changed only by
resolution of the Board of Directors. These provisions may have the effect of
deterring hostile takeovers or delaying changes in control or management of the
Company.

TRANSFER AGENT AND REGISTRAR

American Securities Transfer & Trust, Inc. has been appointed as the
transfer agent and registrar for the Company's Common Stock.

51
<PAGE> 54

SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, there has been no public market for the Common
Stock of the Company. Future sales of substantial amounts of Common Stock in the
public market could adversely affect market prices prevailing from time to time.
Furthermore, since only a limited number of shares will be available for sale
shortly after this offering because of certain contractual and legal
restrictions on resale described below, sales of substantial amounts of Common
Stock of the Company in the public market after the restrictions lapse could
adversely affect the prevailing market price and the ability of the Company to
raise equity capital in the future.

Upon completion of this offering, the Company will have outstanding
6,202,354 shares of Common Stock. Of these shares, the 2,400,000 shares sold in
the offering will generally be freely tradeable without restriction or further
registration under the Securities Act. The remaining approximately 3,800,000
shares of Common Stock may be sold in the public market as follows: (i)
approximately 230,000 shares will be eligible for immediate sale on the date of
this Prospectus; and (ii) upon expiration of lock-up agreements 180 days after
the Effective Date, approximately 525,000 additional shares will be eligible for
sale without restriction pursuant to Rule 144(k) and approximately 3,045,000
shares will be eligible for sale subject to the volume and other restrictions of
Rule 144. In addition, upon the expiration of a lock-up agreement 180 days after
the Effective Date, Union Miniere will be entitled to sell up to approximately
370,000 shares of Common Stock issuable to it upon conversion of the Debentures
subject to the volume and other restrictions of Rule 144. In addition, holders
of vested options to purchase approximately 64,000 shares of Common Stock as of
the date of this Prospectus will be entitled to sell all of such shares upon the
earlier of 90 days after the Effective Date or the filing of a Form S-8
registration statement with respect to such shares. Holders of additional vested
options and warrants to purchase an aggregate of approximately 992,000 shares of
Common Stock as of the date of this Prospectus will be entitled to sell all of
such shares upon expiration of lock-up agreements 180 days after the Effective
Date. Commencing one year after the completion of this offering, Proxima and
Union Miniere, which beneficially own an aggregate of approximately 2,200,000
shares of Common Stock, will be entitled to certain registration rights with
respect to such shares. The exercise of such rights by either Proxima or Union
Miniere could result in a large number of shares being sold in the public market
after one year from its closing of this offering. Future sales of shares by
existing stockholders could have an adverse effect on the market price of the
Common Stock or otherwise impair the Company's ability to raise additional
capital. See "Description of Capital Stock".

The Company's officers, directors and certain stockholders have agreed that
they will not, without the prior written consent of Cruttenden Roth
Incorporated, directly or indirectly offer, sell, contract to sell or otherwise
dispose of approximately 3,570,000 shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock during the
180-day period commencing on the Effective Date. The Company has agreed that it
will not, without the prior written consent of Cruttenden Roth Incorporated,
directly or indirectly offer, sell, contract to sell or otherwise dispose of any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock during such 180-day period except for the sale of
the shares of Common Stock in this offering, the issuance of options and shares
of Common Stock pursuant to employee benefit plans set forth in this Prospectus,
and the issuance of shares of Common Stock upon exercise of warrants or options
presently outstanding. Any shares subject to the lock-up agreements may be
released at any time without notice by Cruttenden Roth Incorporated.

In general, under Rule 144 as currently in effect, beginning 90 days after
the Effective Date, an Affiliate of the Company, or person (or persons whose
shares are aggregated) who has beneficially owned Restricted Shares for at least
one year will be entitled to sell in any three-month period a number of shares
that does not exceed greater of (i) one percent of the then outstanding shares
of the Company's Common Stock or (ii) the average weekly trading volume of the
Company's Common Stock in the Nasdaq National Market during the four calendar
weeks immediately preceding the date on which notice of the sale is filed with
the Securities and Exchange Commission. Sales pursuant to Rule 144 are subject
to certain requirements relating to manner of sale, notice, and the availability
of current public information about the Company. A person (or persons whose
shares are aggregated) who is not deemed to have been an Affiliate of the
Company at any time during the 90

52
<PAGE> 55

days immediately preceding the sale and who has beneficially owned Restricted
Shares for at least two years is entitled to sell such shares under Rule 144(k)
without regard to the limitations described above.

An employee, officer or director of or consultant to the Company who
purchased or was awarded shares or options to purchase shares pursuant to a
written compensatory plan or contract is entitled to rely on the resale
provisions of Rule 701 under the Securities Act, which permits Affiliates and
non-Affiliates to sell their Rule 701 shares without having to comply with Rule
144's holding period restrictions, in each case commencing 90 days after the
date of this Prospectus. In addition, non-Affiliates may sell Rule 701 shares
without complying with the public information, volume and notice provisions of
Rule 144.

The Company intends to file a registration statement under the Securities
Act covering shares of Common Stock reserved for issuance under the Company's
Stock Plans and Purchase Plan. Based on the number of options outstanding and
options and shares reserved for issuance at March 31, 1997, such registration
statement would cover approximately 2,470,000 shares. Such registration
statement is expected to be filed and to become effective as soon as practicable
after the date hereof. Shares registered under such registration statement will,
subject to Rule 144 volume limitations applicable to Affiliates, be available
for sale in the open market, unless such shares are subject to vesting
restrictions with the Company or the lock up agreements described above. See
"Management."

53
<PAGE> 56

UNDERWRITING

Cruttenden Roth Incorporated and L.H. Friend, Weinress, Frankson & Presson,
Inc. are acting as the representatives (the "Representatives") of each of the
underwriters named below (the "Underwriters"). Subject to the terms and
conditions set forth in an underwriting agreement dated as of the date hereof
(the "Underwriting Agreement"), the Underwriters named below have severally
agreed to purchase, and the Company and the Selling Stockholders have agreed to
sell to them, the aggregate number of shares of Common Stock set forth opposite
their respective names:

<TABLE>
<CAPTION>
NAME NUMBER OF SHARES
--------------------------------------------------------------------- ----------------
<S> <C>
Cruttenden Roth Incorporated.........................................
L.H. Friend, Weinress, Frankson & Presson, Inc.......................

----------------
Total...................................................... 2,400,000
=============
</TABLE>

The Underwriting Agreement provides that the obligations of the several
Underwriters are subject to the approval of certain legal matters by counsel and
various other conditions. The nature of the Underwriters' obligations is such
that they are committed to purchase all of the above shares if any are
purchased. The Underwriters propose to offer the shares of Common Stock directly
to the public at the initial public offering price set forth on the cover page
of this prospectus and to certain dealers at such price less a concession not in
excess of $ per share. The Underwriters may allow, and such dealers may
re-allow, a concession not in excess of $ per share to certain other
dealers. After the offering, the offering price and other selling terms may be
changed by the Representatives.

Prior to consummation of the offering, there has been no public market for
the Common Stock of the Company. Accordingly, the initial public offering price
has been determined by negotiation between the Company and the Representatives.
Among the factors considered in determining the initial public offering price
were the Company's results of operations, the Company's current financing
condition, its future prospects, the market for its products and services, the
experience of its management, the economics of the industry in general, the
general condition of the equity securities market, the market capitalization and
stages of development of other companies which the Company and the
Representatives believed to be comparable to the Company and other relevant
factors. There can be no assurance that any active trading market will develop
for the Common Stock or as to the price at which the Common Stock may trade in
the public market from time to time subsequent to the offering made hereby.

The Company has granted to the Underwriters an option, expiring 45 days
from the date of this Prospectus, to purchase up to 360,000 additional shares of
Common Stock on the same terms as set forth on the cover page of this
Prospectus, solely to cover over-allotments, if any, incurred in the sale of the
shares of Common Stock offered hereby. If the Underwriters exercise the option,
each Underwriter will have a firm commitment, subject to certain conditions, to
purchase such number of additional shares of Common Stock as is proportionate to
such Underwriter's initial commitment to purchase shares from the Company.

In connection with this offering, certain Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in accordance
with the Securities Exchange Act of 1934 pursuant to which such persons may bid
for or purchase Common Stock for the purpose of stabilizing its market price.
The Underwriters also may create a short position for the account of the
Underwriters by selling more Common Stock in connection with this offering than
they are committed to purchase from the Company and the Selling Stockholders,
and in such case may purchase Common Stock in the open market following
completion of this offering to convert all or a portion of such shares of Common

54
<PAGE> 57

Stock or may exercise the Underwriter's over-allotment option referred to above.
In addition, the Representative, on behalf of the Underwriters, may impose
"penalty bids" under contractual arrangements with the Underwriters whereby it
may reclaim from an Underwriter (or dealer participating in this offering), for
the account of the other Underwriters, the selling concession with respect to
Common Stock that is distributed in this offering but subsequently purchased for
the account of the Underwriters in the open market. Any of the transactions
described in this paragraph may result in the maintenance of the price of the
Common Stock at a level above that which might otherwise prevail in the open
market. None of the transactions described in this paragraph are required, and,
if they are undertaken, they may be discontinued at any time.

The Company has also agreed to sell to the Representatives warrants to
purchase up to 200,000 shares of Common Stock at a price of $.001 per warrant.
The Representatives' Warrants will be exercisable for a period of four years,
commencing one year after the date of this Prospectus, at an initial per share
exercise price equal to 130% of the price to the public set forth on the cover
page of this Prospectus. The Representatives' Warrants are not redeemable by the
Company under any circumstances. Neither the Representatives' Warrants nor the
shares of Common Stock issuable upon exercise thereof may be transferred,
assigned or hypothecated until one year from the date of this Prospectus, except
that they may be assigned, in whole or in part, to any successor, officer,
director, member or partner of the Representatives.

The Company has agreed with the Representatives that if, during the
four-year period commencing one year following the date of this prospectus, the
Company registers any of its Common Stock for sale pursuant to a registration
statement (with the exception of Form S-4, Form S-8 or other inappropriate
form), it will use its best efforts, upon request of any of the holders of the
Representatives' Warrants and/or the underlying shares, to include such
securities as a part of the registration statement. The Company will bear all
the costs, except underwriting discounts, for one "piggy-back" registration.

The Company, its executive officers, directors and principal stockholders
and option holders have agreed that for a period of 180 days after the date of
this Prospectus they will not, directly or indirectly, offer, sell, contract to
sell, grant any option to sell, or otherwise dispose of shares of Common Stock
or other securities which are substantially similar to the Common Stock or
securities convertible into or exercisable or exchangeable for or any rights to
purchase or acquire Common Stock or securities which are substantially similar
to the Common Stock without the prior written consent of Cruttenden Roth
Incorporated.

The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments that the Underwriters may be
required to make in respect thereof.

The Company has also agreed to pay to the Representatives a non-accountable
expense allowance equal to 2% of the aggregate offering price to the public for
due diligence and other out-of-pocket expenses.

The Representatives have informed the Company that the Underwriters do not
intend to confirm sales to any accounts over which they exercise discretionary
authority.

55
<PAGE> 58

LEGAL MATTERS

The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by its counsel, Cooley Godward LLP, San Diego, California.
Certain legal matters in connection with the offering will be passed upon for
the Underwriters by Gray Cary Ware & Freidenrich, San Diego, California.

EXPERTS

The Consolidated Financial Statements of Laser Power Corporation at August
31, 1995 and 1996, and for each of the three years in the period ended August
31, 1996 appearing in this Prospectus and Registration Statement have been
audited by Ernst & Young LLP, independent auditors and are included herein in
reliance upon such report given the authority of said firm as experts in
accounting and auditing.

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission,
Washington, D.C., a Registration Statement on Form SB-2 under the Act, with
respect to the Common Stock offered hereby. This Prospectus does not contain all
of the information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information with respect to the Company and such
Common Stock, reference is made to the Registration Statement and the exhibits
and schedules filed as part thereof. Statements contained in this Prospectus as
to the contents of any contract or document filed as an exhibit to the
Registration Statement is qualified by reference to such exhibit as filed. A
copy of the Registration Statement, and the exhibits and schedules thereto, may
be inspected without charge at the public reference facilities maintained by the
SEC in Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
SEC's regional offices located at the Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade
Center, 13th Floor, New York, New York 10048, and copies of all or any part of
the Registration Statement may be obtained from such offices upon the payment of
the fees prescribed by the SEC. The SEC maintains a World Wide Web site that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC. The address of the
SEC's World Wide Web site is http://www.sec.gov. Upon effectiveness of the
Registration Statement, the Company will be a reporting company.

56
<PAGE> 59

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<S> <C>
Report of Independent Auditors......................................................... F-2
Consolidated Balance Sheets at August 31, 1995 and 1996 and at February 28, 1997
(unaudited).......................................................................... F-3
Consolidated Statements of Operations for the years ended August 31, 1994, 1995 and
1996 and the six months ended February 29, 1996 (unaudited) and February 28, 1997
(unaudited).......................................................................... F-4
Consolidated Statements of Stockholders' Equity for the years ended August 31, 1994,
1995 and 1996 and the six months February 28, 1997 (unaudited)....................... F-5
Consolidated Statements of Cash Flows for the years ended August 31, 1994, 1995 and
1996 and the six months ended February 29, 1996 (unaudited) and February 28, 1997
(unaudited).......................................................................... F-6
Notes to Consolidated Financial Statements............................................. F-7
</TABLE>

F-1
<PAGE> 60

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Laser Power Corporation

We have audited the accompanying consolidated balance sheets of Laser Power
Corporation at August 31, 1996 and 1995, and the related consolidated statements
of operations, stockholders' equity and cash flows for each of the three years
in the period ended August 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Laser Power
Corporation at August 31, 1996 and 1995, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
August 31, 1996, in conformity with generally accepted accounting principles.

ERNST & YOUNG LLP

San Diego, California
October 9, 1996,
except for Note 5 ("Changes in Capitalization"), as to which the date is
March 25, 1997

F-2
<PAGE> 61

LASER POWER CORPORATION

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
PRO FORMA
AUGUST 31, STOCKHOLDERS'
--------------------------- FEBRUARY 28, EQUITY AT
1995 1996 1997 FEBRUARY 28,
----------- ----------- ------------ 1997
(UNAUDITED) ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........... $ 257,309 $ 298,160 $ 128,375
Accounts receivable, net of
allowance for doubtful accounts
of $98,000 in 1995, $107,847 in
1996 and $151,452 in 1997........ 2,453,603 2,992,556 3,211,247
Inventories, net.................... 2,148,621 2,729,865 2,918,771
Other current assets................ 151,867 166,445 288,048
----------- ----------- -----------
Total current assets........ 5,011,400 6,187,026 6,546,441
Property and equipment, net........... 4,408,689 4,187,387 5,194,707
Intangibles and other assets (net of
accumulated amortization)........... 787,351 819,286 986,920
----------- ----------- -----------
Total assets................ $10,207,440 $11,193,699 $ 12,728,068
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable to bank................ $ -- $ -- $ 773,998
Accounts payable.................... 1,269,876 1,339,596 1,927,285
Accrued compensation and related
expenses......................... 424,359 739,385 756,915
Other current liabilities........... 566,942 781,936 692,395
Current portion of long-term debt... 438,687 488,083 403,969
----------- ----------- -----------
Total current liabilities... 2,699,864 3,349,000 4,554,562
Deferred rent......................... 375,699 305,247 270,021
Long-term debt........................ 801,520 558,975 686,822
Subordinated convertible debentures... 1,660,000 1,660,000 1,660,000
Stockholders' equity:
Convertible preferred stock, $.125
par value ($.001 par value pro
forma):
Authorized -- 3,000,000 shares
Issued and
outstanding -- 1,143,196 shares
in 1995, and 1,610,891 shares
in 1996 and 1997 (none pro
forma)......................... 142,899 201,361 201,361 $ --
----------- ----------- -----------
Common stock, par value $.001:
Authorized -- 15,000,000 shares
Issued and
outstanding -- 3,000,475 shares
in 1995, 3,000,106 shares in
1996 and 3,009,102 shares in
1997 (4,202,354 shares pro
forma)......................... 3,001 3,000 3,009 4,202
Additional paid-in capital.......... 8,411,237 10,223,305 10,263,869 10,464,037
----------- ----------- -----------
Foreign currency translation
adjustment....................... 112,690 123,222 5,891 5,891
Accumulated deficit................. (3,999,470) (5,230,411) (4,917,467) (4,917,467)
----------- ----------- ----------- -----------
Total stockholders'
equity.................... 4,670,357 5,320,477 5,556,663 $ 5,556,663
----------- ----------- ----------- ===========
Total liabilities and
stockholders' equity...... $10,207,440 $11,193,699 $ 12,728,068
=========== =========== ===========
</TABLE>

See accompanying notes.

F-3
<PAGE> 62

LASER POWER CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------------
YEARS ENDED AUGUST 31, FEBRUARY FEBRUARY
--------------------------------------- 29, 28,
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Product sales................. $10,157,944 $11,858,713 $15,194,472 $ 6,880,416 $ 7,995,334
Contract research and
development................ 1,727,069 2,714,208 3,712,967 1,682,110 3,128,526
----------- ----------- ----------- ----------- -----------
Total revenues........ 11,885,013 14,572,921 18,907,439 8,562,526 11,123,860
Costs and expenses:
Cost of product sales......... 6,550,060 7,994,255 9,887,809 4,600,566 5,474,848
Contract research and
development................ 1,307,872 2,058,873 2,941,947 1,262,414 2,502,224
Internal research and
development................ 1,567,851 2,857,452 2,689,182 1,460,823 389,409
Selling, general and
administrative............. 3,204,720 3,582,773 4,306,329 2,083,441 2,277,688
----------- ----------- ----------- ----------- -----------
Total costs and
expenses............ 12,630,503 16,493,353 19,825,267 9,407,244 10,644,169
----------- ----------- ----------- ----------- -----------
Income (loss) from operations... (745,490) (1,920,432) (917,828) (844,718) 479,691
Interest expense, net........... 267,849 325,928 299,832 152,626 144,507
----------- ----------- ----------- ----------- -----------
Income (loss) before income
taxes......................... (1,013,339) (2,246,360) (1,217,660) (997,344) 335,184
Income taxes.................... -- 22,523 13,281 6,993 22,240
----------- ----------- ----------- ----------- -----------
Net income (loss)............... $(1,013,339) $(2,268,883) $(1,230,941) $(1,004,337) $ 312,944
=========== =========== =========== =========== ===========
Pro forma net income (loss) per
share......................... $ (0.29) $ 0.06
=========== ===========
Shares used in per share
computations.................. 4,311,000 4,887,000
=========== ===========
</TABLE>

See accompanying notes.

F-4
<PAGE> 63

LASER POWER CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
CONVERTIBLE FOREIGN
PREFERRED STOCK COMMON STOCK ADDITIONAL CURRENCY
-------------------- -------------------- PAID-IN TRANSLATION ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL ADJUSTMENT DEFICIT TOTAL
--------- -------- --------- -------- ----------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at August 31,
1993...................... -- $ -- 2,987,153 $ 2,988 $ 3,963,166 $ (14,469) $ (717,248) $ 3,234,437
Issuance of preferred
stock warrants.......... -- -- -- -- 5,000 -- -- 5,000
Issuance of preferred
stock, net of issuance
cost of $26,773......... 382,172 47,771 -- -- 1,454,148 -- -- 1,501,919
Foreign currency
translation
adjustment.............. -- -- -- -- -- 58,726 -- 58,726
Net loss.................. -- -- -- -- -- -- (1,013,339) (1,013,339)
--------- -------- --------- ------ ----------- --------- ----------- -----------
Balance at August 31,
1994...................... 382,172 47,771 2,987,153 2,988 5,422,314 44,257 (1,730,587) 3,786,743
Issuance of preferred
stock................... 761,024 95,128 -- -- 2,948,968 -- -- 3,044,096
Issuance of common
stock................... -- -- 13,322 13 39,955 -- -- 39,968
Foreign currency
translation
adjustment.............. -- -- -- -- -- 68,433 -- 68,433
Net loss.................. -- -- -- -- -- -- (2,268,883) (2,268,883)
--------- -------- --------- ------ ----------- --------- ----------- -----------
Balance at August 31,
1995...................... 1,143,196 142,899 3,000,475 3,001 8,411,237 112,690 (3,999,470) 4,670,357
Issuance of preferred
stock................... 467,695 58,462 -- -- 1,812,318 -- -- 1,870,780
Repurchase of common
stock................... -- -- (369) (1) (250) -- -- (251)
Foreign currency
translation
adjustment.............. -- -- -- -- -- 10,532 -- 10,532
Net loss.................. -- -- -- -- -- -- (1,230,941) (1,230,941)
--------- -------- --------- ------ ----------- --------- ----------- -----------
Balance at August 31,
1996...................... 1,610,891 201,361 3,000,106 3,000 10,223,305 123,222 (5,230,411) 5,320,477
Issuance of common
stock................... -- -- 8,996 9 40,564 -- -- 40,573
Foreign currency
translation
adjustment.............. -- -- -- -- -- (117,331) -- (117,331)
Net income................ -- -- -- -- -- -- 312,944 312,944
--------- -------- --------- ------ ----------- --------- ----------- -----------
Balance at February 28, 1997
(Unaudited)............... 1,610,891 $201,361 3,009,102 $ 3,009 $10,263,869 $ 5,891 $ (4,917,467) $ 5,556,663
========= ======== ========= ====== =========== ========= =========== ===========
</TABLE>

See accompanying notes.

F-5
<PAGE> 64

LASER POWER CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED AUGUST 31, ---------------------------
--------------------------------------- FEBRUARY 29, FEBRUARY 28,
1994 1995 1996 1996 1997
----------- ----------- ----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) from operations......... $(1,013,339) $(2,268,883) $(1,230,941) $ (1,004,337) $ 312,944
Adjustments to reconcile net income (loss)
to net cash used for operating
activities:
Depreciation and amortization........... 845,762 997,168 1,037,941 493,539 528,862
Loss on disposal of property and
equipment............................. -- -- 84,936 -- --
Deferred rent........................... (70,452) (70,452) (70,452) (35,226) (35,226)
Provision for losses on accounts
receivable............................ 20,000 6,000 9,847 4,510 43,605
Changes in operating assets and
liabilities:
Accounts receivable................... (81,547) (358,550) (548,800) (316,715) (262,296)
Inventories........................... (620,776) (518,900) (581,244) 20,486 (188,906)
Other current assets.................. 32,557 (52,414) (14,578) (19,143) (121,603)
Accounts payable...................... 537,029 294,144 69,720 259,275 587,689
Accrued compensation and related
expenses............................ 105,338 17,526 315,026 (47,323) 17,530
Other current liabilities............. 228,652 135,445 214,994 186,558 (89,541)
----------- ----------- ----------- ----------- -----------
Net cash (used in) provided by
operating activities........... (16,776) (1,818,916) (713,551) (458,376) 793,058
INVESTING ACTIVITIES
Additions to property and equipment....... (1,306,478) (917,125) (813,089) (305,621) (1,616,161)
(Increase) decrease in intangibles and
other assets............................ (90,438) 11,648 (109,889) (71,476) (153,383)
----------- ----------- ----------- ----------- -----------
Net cash used in investing
activities..................... (1,396,916) (905,477) (922,978) (377,097) (1,769,544)
FINANCING ACTIVITIES
Deferred public offering costs............ -- -- -- -- (51,603)
Proceeds from borrowings.................. 2,329,221 -- 251,046 447,933 1,019,950
Payments on borrowings.................... (2,136,975) (496,622) (444,195) (197,715) (202,219)
Net proceeds from issuance and repurchase
of stock................................ 1,506,919 3,084,064 1,870,529 580,000 40,573
----------- ----------- ----------- ----------- -----------
Net cash provided by financing
activities..................... 1,699,165 2,587,442 1,677,380 830,218 806,701
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents............................. 285,473 (136,951) 40,851 (5,255) (169,785)
Cash and cash equivalents at beginning of
the period.............................. 108,787 394,260 257,309 257,309 298,160
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end of the
period................................ $ 394,260 $ 257,309 $ 298,160 $ 252,054 $ 128,375
=========== =========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid during the period for
interest................................ $ 255,000 $ 305,000 $ 313,000 $ 156,000 $ 150,000
=========== =========== =========== =========== ===========
Capital lease obligations................. $ 243,277 $ -- $ 78,880 $ -- $ --
=========== =========== =========== =========== ===========
</TABLE>

See accompanying notes.

F-6
<PAGE> 65

LASER POWER CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(INFORMATION SUBSEQUENT TO AUGUST 31, 1996 AND PERTAINING TO FEBRUARY 28, 1997
AND THE
SIX-MONTH PERIODS ENDED FEBRUARY 29, 1996 AND FEBRUARY 28, 1997 IS UNAUDITED)

1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business and Basis of Presentation

Laser Power Corporation ("Laser Power" or the "Company") operates in one
business segment and designs, manufactures and markets high performance laser
optics for industrial, medical and military lasers and laser systems. Laser
optics are precision reflectors and mirrors used to reflect, collect and focus
laser beams. The Company's products are sold to laser system OEMs and end users
as original and replacement components in high power CO(2) and other lasers. The
Company's core competencies lie in its surface finishings and thin film
coatings, which are key elements involved in all high-performance laser optic
components. Such lasers are used in a variety of industrial processing
applications, such as sheet metal cutting, automobile body welding,
surface-hardening for engine cylinder walls, scribing and drilling delicate
ceramic circuits. The Company also sells high performance laser optics to
medical equipment OEMs for lower power CO(2) lasers used in certain therapeutic
and cosmetic procedures, including heart surgery and skin wrinkle removal. In
addition, the Company has developed very low absorption thin film coatings for
optics for anti-missile laser systems. The Company also conducts contract
research in the development and applications of advanced solid state lasers.
Substantially all of the Company's product revenues to date are attributable to
the sale of laser optics products for the industrial processing and medical
industries.

The accompanying consolidated financial statements present the financial
position, results of operations and cash flows of Laser Power Corporation (the
"Company") and its subsidiaries Laser Power Optics de Mexico S.A. de C.V.
("Laser Power Mexico") and Radius Engineering N.V. ("Radius"). The Company
operates through three divisions: Laser Power Optics, which manufactures and
sells optics components for lasers; Laser Power Research, which performs funded
contract research for commercial applications and for various agencies and
laboratories of the U.S. federal government; and Laser Power Microlasers, which
performs funded contract research for commercial applications and will be the
entity responsible for manufacturing and marketing the Company's new microlaser
technology. Laser Power Mexico performs a portion of the manufacturing of Laser
Power Optics division and does not sell products to unaffiliated customers. All
significant intercompany accounts and transactions have been eliminated in
consolidation.

Interim Financial Information (Unaudited)

The financial statements at August 31, 1996 and for the six-month periods
ended February 29, 1996 and February 28, 1997 include all adjustments
(consisting only of normal recurring adjustments) which management considers
necessary for a fair statement of the financial position at such dates and the
operating results and cash flows for those periods. Results for interim periods
are not necessarily indicative of results for the entire year or any future
periods.

Revenues

Product sales are recorded upon shipment. Revenues from contract research
and development involve both commercial and governmental contracts and are
recognized using the percentage-of-completion method based on the ratio of costs
incurred to date to total estimated costs. Total revenues from government
contracts were $1,454,000, $2,254,000, $3,397,000, $1,531,000 and $1,748,000 in
1994, 1995 and 1996 and the six months ended February 29, 1996 and February 28,
1997, respectively. Revenue in excess of billings of $326,000 and $523,000 have
been included in accounts receivable at August 31, 1996 and February 28 1997,
respectively. Net billings in excess of revenue of $149,000 have been included
as other current liabilities in the

F-7
<PAGE> 66

LASER POWER CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

accompanying balance sheet at August 31, 1995. Provisions are made to recognize
any anticipated losses on contracts when losses become evident.

Cash and Cash Equivalents

Cash and cash equivalents consist of cash and highly liquid investments
with maturities of three months or less when purchased.

Inventories

Inventories are stated at lower of cost (first-in, first-out) or market.
Market is based upon estimated net realizable value.

Depreciation and Amortization

Machinery, equipment and office furniture are depreciated over their
estimated useful lives (3 to 15 years) on the straight-line method and leasehold
improvements are amortized over the useful life of the asset or the lease term,
whichever is less.

Intangible assets consist primarily of goodwill, patents and licenses.
Goodwill is amortized over 20 years and patents and licenses (which are
primarily related to the microlaser technology) are amortized over the shorter
of the estimated useful life or the legal life. Amortization of patents is
initiated when the related technology is ready for commercial release.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of resources and expenses during the
reporting period. Actual results could differ from those estimates.

Concentration of Credit Risk

The Company primarily sells its products to commercial, military and
medical companies. The Company performs periodic credit evaluations of its
customers and has not experienced significant losses with respect to its
accounts receivable.

Impairment of Long-Lived Assets

In March 1995, the Financial Accounting Standards Board issued SFAS No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of ("SFAS 121"), effective for fiscal years beginning
after December 15, 1995. SFAS 121 requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount. SFAS 121 also addresses the accounting
for long-lived assets that are expected to be disposed of. Effective September
1, 1996, the Company adopted SFAS 121. The adoption of SFAS 121 did not have a
material effect on the Company's financial position or results of operations.

F-8
<PAGE> 67

LASER POWER CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Stock Options

In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, Accounting for Stock-Based Compensation("SFAS 123"), effective for fiscal
years beginning after December 15, 1995. SFAS 123 established the fair
value-based method of accounting for stock-based compensation arrangements under
which compensation cost is determined using the fair value of the stock option
at the grant date and the number of options vested, and is recognized over the
periods in which the related services are rendered as allowed by SFAS 123. The
Company has elected to continue with the current intrinsic value-based method,
under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees" and related interpretations.

Net Income (Loss) Per Share

Historical net income (loss) per share is computed using the weighted
average number of common shares and common stock equivalents outstanding during
the periods presented. Common equivalent shares result from stock options and
warrants. For loss periods, common equivalent shares are excluded from the
computation as their effect would be antidilutive, except that the Securities
and Exchange Commission requires common and common share equivalents issued
during the twelve-month period prior to the initial filing of a proposed public
offering, to be included in the calculation as if they were outstanding for all
periods presented (using the treasury stock method and the assumed initial
public offering price).

Historical net income (loss) per share information is as follows:

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED AUGUST 31, -----------------------------
---------------------------- FEBRUARY 29, FEBRUARY 28,
1994 1995 1996 1996 1997
------ ------ ------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net income (loss) per share............. $(0.31) $(0.68) $(0.37) $(0.30) $ 0.08
====== ====== ====== ====== ======
Shares used in historical per share
computations (in thousands)........... 3,318 3,325 3,331 3,331 3,817
====== ====== ====== ====== ======
</TABLE>

Supplemental net income (loss) per share has been computed as described
above and also gives effect to the repayment of a portion of the Company's
outstanding debt, and resulting reduction of interest expense, as if the
proceeds, in an amount equal to the outstanding balance under the credit
facility, anticipated by this initial public offering had been received at the
original date of issuance of the credit facility and the number of shares of
common stock whose proceeds are to be used to retire the debt were outstanding
from that same date (see Note 3).

<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
AUGUST 31, FEBRUARY 28,
1996 1997
---------- ------------
<S> <C> <C>
Supplemental net income (loss) per share........................... $(0.35) $ 0.09
====== ======
Shares used in computing supplemental net income (loss) per share
(in thousands)................................................... 3,405 3,974
====== ======
</TABLE>

Pro Forma Net Income (Loss) Per Share and Unaudited Pro Forma Stockholders'
Equity

Pro forma net income (loss) per share has been computed as described above
and also gives effect to the conversion of the convertible preferred stock,
which will convert to common stock upon completion of the Company's initial
public offering, using the as if-converted method from the original dates of
issuance.

If the offering contemplated by this Prospectus is consummated, all of
convertible preferred stock outstanding as of the closing date will be converted
into 1,193,252 shares of common stock. Unaudited pro

F-9
<PAGE> 68

LASER POWER CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

forma stockholders' equity at February 28, 1997, as adjusted for the conversion
of the convertible preferred stock, is presented in the accompanying balance
sheet.

2. SELECTED BALANCE SHEET DETAILS

<TABLE>
<CAPTION>
AUGUST 31, FEBRUARY
--------------------------- 28,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Inventories:
Raw materials..................................... $ 547,405 $ 909,563 $ 1,095,197
Work in progress.................................. 945,413 1,148,439 1,300,343
Finished goods.................................... 655,803 671,863 523,231
---------- ----------- -----------
$ 2,148,621 $ 2,729,865 $ 2,918,771
========== =========== ===========
Property and equipment, at cost:
Machinery and equipment........................... $ 8,298,670 $ 8,375,250 $ 9,741,675
Leasehold improvements............................ 964,188 1,012,629 1,021,712
Office furniture and equipment.................... 685,975 861,952 880,603
---------- ----------- -----------
9,948,833 10,249,831 11,643,990
Less accumulated depreciation and amortization...... (5,540,144) (6,062,444) (6,449,283)
---------- ----------- -----------
$ 4,408,689 $ 4,187,387 $ 5,194,707
========== =========== ===========
Intangible and other assets:
Goodwill in foreign subsidiary.................... $ 549,100 $ 549,100 $ 549,100
Patents and licenses.............................. 190,915 302,513 457,221
Other............................................. 275,757 274,048 324,326
---------- ----------- -----------
1,015,772 1,125,661 1,330,647
Less accumulated amortization....................... (228,421) (306,375) (343,727)
---------- ----------- -----------
$ 787,351 $ 819,286 $ 986,920
========== =========== ===========
Accrued compensation and related expenses:
Accrued bonuses................................... $ -- $ 240,000 $ 175,938
Other............................................. 424,359 499,385 580,977
---------- ----------- -----------
$ 424,359 $ 739,385 $ 756,915
========== =========== ===========
Other current liabilities:
Customer advances................................. $ 58,597 $ 326,562 $ 222,187
Other............................................. 508,345 455,374 470,208
---------- ----------- -----------
$ 566,942 $ 781,936 $ 692,395
========== =========== ===========
</TABLE>

F-10
<PAGE> 69

LASER POWER CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3. LONG-TERM DEBT AND OTHER FINANCING AGREEMENTS

In January 1997, the Company renewed a line of credit with a bank, subject
to maximum advances of $2,000,000 and at 1% above the bank's prime rate (9.25%
at February 28, 1997). The line of credit expires on March 1, 1998 and there was
$773,998 outstanding under the line of credit at February 28, 1997.

Long-term debt consists of the following:

<TABLE>
<CAPTION>
AUGUST 31, FEBRUARY
------------------------- 28,
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Promissory note........................................ $ 104,205 $ 90,203 $ 84,020
Term note payable to bank.............................. 500,000 277,779 185,187
Equipment line of credit from bank..................... -- 172,166 418,118
Equipment financing from Proxima....................... 386,161 273,936 217,824
Other equipment financing.............................. 215,541 225,534 179,628
Other.................................................. 34,300 7,440 6,014
---------- ---------- ----------
1,240,207 1,047,058 1,090,791
Less current portion................................... 438,687 488,083 403,969
---------- ---------- ----------
$ 801,520 $ 558,975 $ 686,822
========== ========== ==========
</TABLE>

The promissory note is payable in monthly installments of principal and
interest of $1,840 through September 2001. Borrowings under the promissory note
are secured by equipment and bear interest at 8.25%.

The term note payable to the bank is due in monthly principal payments of
$18,519 plus interest, with the final installment consisting of all remaining
unpaid principal due and payable in full no later than December 31, 1997. The
term note bears interest at 2% above the bank's prime rate (10.25% at February
28, 1997).

In January 1997, the Company renewed an equipment line of credit with a
bank, subject to maximum advances of $1,500,000 at 1.25% above the bank's prime
rate (9.50% at February 28, 1997). Any advances, which will be used to purchase
new machinery, will be converted on August 1, 1997 to a five-year term loan so
long as the Company is in compliance with all the terms of the note. In the
event of noncompliance, the amount outstanding will be payable in full. There
were $418,118 in borrowings under the equipment line of credit at February 28,
1997.

All bank borrowings are secured by accounts receivable, inventory,
intangibles, and property and equipment, and contain restrictive covenants.
Restrictive covenants include the maintenance of minimum tangible net worth,
debt to equity and cash flow ratios, as well as restrictions on capital and
lease expenditures, investment levels in the Company's European subsidiary,
additional borrowings and payment of dividends.

Other equipment financing agreements are payable in monthly installments of
principal and interest through March 2001. Borrowings under this financing
agreements are secured by specific equipment and bear interest at rates ranging
from 9.0% to 10.7% at February 28, 1997.

The Company entered into an equipment line of credit agreement with Proxima
Corporation on June 30, 1994, which provided for maximum borrowings of $500,000.
In May 1995, the outstanding borrowings were converted to a four-year term loan
bearing interest at 1.5% above the bank's prime rate (9.75% at February 28,
1997). The amount owed under the note has been guaranteed by the Company's Chief
Executive Officer.

In November 1987, the Company obtained debt and equity financing from Union
Miniere ("Union"). The Company issued 483,333 shares of common stock for
$1,053,000 cash (net of stock issuance costs of $107,000) and subordinated
convertible debentures amounting to $1,340,000. In December 1988, the

F-11
<PAGE> 70

LASER POWER CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Company issued an additional $320,000 of subordinated convertible debentures to
Union Miniere. In March 1997, the maturity date of the debentures was extended
to November 2, 2000 and the conversion rate for which the debentures are
convertible into common stock was set at $5.25 per share but in no event will be
less than $4.50 per share. The debentures are subordinated to all bank
borrowings and interest is payable semi-annually at 1% above a bank's prime rate
(9.25% at February 28, 1997) subject to a minimum rate of 5 1/2% and a maximum
rate of the lesser of 11.5% or the maximum rate permitted by law. The debentures
provide for restrictive covenants similar to those of the bank borrowings.

Principal maturities on the subordinated convertible debentures and
long-term debt for each of the years ending subsequent to period ended February
28, 1997 are as follows:

4. INCOME TAXES

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The components of the
Company's deferred tax liabilities and assets are as follows:

<TABLE>
<CAPTION>
AUGUST 31,
---------------------------
1995 1996
----------- -----------
<S> <C> <C>
Deferred tax liability-depreciation............................... $ (574,000) $ (535,000)
Deferred tax assets:
Tax basis operating loss and credit carryforwards............... 2,091,000 2,504,000
Other........................................................... 148,000 273,000
----------- -----------
Total deferred tax assets......................................... 2,239,000 2,777,000
----------- -----------
Net deferred tax assets........................................... 1,665,000 2,242,000
Valuation allowance............................................... (1,665,000) (2,242,000)
----------- -----------
Net deferred tax accounts......................................... $ -- $ --
=========== ===========
</TABLE>

At August 31, 1996, the Company has net operating loss carryforwards for
federal and California income tax purposes of approximately $5,810,000 and
$2,844,000, respectively, which may be applied against future taxable income.
These carryforwards will begin to expire in 2001 and 1998, respectively, unless
previously utilized.

The Company also has investment tax credit, research and development
credit, and targeted jobs tax credit carryforwards at August 31, 1996
aggregating approximately $300,000. These tax credit carryforwards will expire
in 1997 through 2004 unless previously utilized.

Other than alternative minimum taxes, no income taxes have been provided
for the six-month period ended February 28, 1997 because of the utilization of
tax loss carryforwards.

If the offering contemplated by this Prospectus is consummated, a change in
ownership of more than 50% within a three-year period will have occurred;
however, management believes that the Company's ability to use the net operating
loss and tax credit carryforwards will not be materially impaired.

F-12
<PAGE> 71

LASER POWER CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5. STOCKHOLDERS' EQUITY

Preferred Stock and Proxima Corporation

In January 1994, the Company executed a Stock Purchase Agreement with
Proxima Corporation ("Proxima"). Under the terms of the agreement, Proxima could
invest in the Company through purchases of Series A Preferred Stock. The Company
and Proxima also entered into an agreement providing for technology licenses and
cooperative development of new technologies (see Note 8). During 1994, 1995 and
1996, Proxima purchased 382,172, 761,024 and 467,695 shares of Series A
Preferred Stock, respectively.

The preferred shares have voting rights and are convertible into the
Company's common shares on a 1 for 1.35 basis, subject to antidilution
adjustments under certain circumstances. The preferred shares may be converted
with the approval of the preferred shareholders. Proceeds on liquidation of the
Company are distributed to holders of the Series A Preferred Stock and common
stock pro rata, on an as-converted basis, except in certain liquidations
involving bankruptcy cases, where the Series A Preferred stockholders will have
preferences. Series A Preferred stockholders are entitled to receive annual
dividends of $0.32 per share, when and if declared by the Company's Board of
Directors, prior to and in preference to any dividends being declared or paid on
the Common Stock. Such dividends are non-cumulative.

Common Stock Warrants

Periodically the Company will issue warrants to purchase common stock to
outside directors and affiliates in lieu of stock options. During the three year
period ended August 31, 1996, and the six months ended February 28, 1997, 83,330
and 53,330 warrants were issued to outside directors, respectively. The warrants
vest over periods of up to five years. Warrants to purchase 333,330 and 386,660
shares of common stock at $3.00 to $4.50 per share are outstanding at December
31, 1996 and February 28, 1997, respectively. The warrants begin to expire from
September 2002 to December 2006.

Stock Option Plans

The Company's 1981 Stock Option Plan was approved by the Board of Directors
and stockholders in 1981, as amended (the "1981 Plan"). The Company's 1993 Stock
Option Plan (the "1993 Plan") was approved by the Board of Directors and
stockholders in September 1993. The exercise price of options granted will be at
fair market value of the stock on the date of grant and the options granted vest
over a five-year period commencing on the date of grant in increments of twenty
percent and are exercisable for a period of ten years after the date of grant.
Options to purchase 249,679 and 120,700 shares of common stock remain eligible
for future grant at August 31, 1996 and February 28, 1997, respectively. (See
"Changes in Capitalization" below).

The Company has 266,665 and 474,663 non-qualified options outstanding as of
August 31, 1996 and February 28, 1997, respectively. These options were issued
to certain employees and an officer and at those dates, 66,665 and 274,663
options were issued outside the Company's option plans. The Company issued stock
options to purchase shares of the Company's common stock at $3.00 to $4.50 per
share. These options will begin to expire on December 2001 to February 2007.

F-13
<PAGE> 72

LASER POWER CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table summarizes stock option and warrant activity:

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
NUMBER OF PRICE PER PRICE PER
SHARES SHARE SHARE
--------- -------------- ---------
<S> <C> <C> <C>
Outstanding at August 31, 1993......................... 966,000 $3.00 -- $4.50 $3.16
Granted.............................................. 241,667 4.50 -- 6.00 4.76
Exercised............................................ -- -- --
Canceled............................................. (8,333) 3.00 -- 4.50 3.00
--------- ----------- -----
Outstanding at August 31, 1994......................... 1,199,334 3.00 -- 6.00 3.48
Granted.............................................. 127,333 4.50 4.50
Exercised............................................ -- -- --
Canceled............................................. (148,358) 3.00 -- 6.00 4.85
--------- ----------- -----
Outstanding at August 31, 1995......................... 1,178,309 3.00 -- 4.50 3.40
Granted.............................................. 131,325 4.50 4.50
Exercised............................................ (6) 4.50 4.50
Canceled............................................. (81,656) 3.00 -- 4.50 3.46
--------- ----------- -----
Outstanding at August 31, 1996......................... 1,227,972 3.00 -- 4.50 3.51
Granted.............................................. 390,307 3.00 -- 4.50 4.49
Exercised............................................ -- -- --
Canceled............................................. (6,666) 3.00 3.00
--------- ----------- -----
Outstanding at February 28, 1997....................... 1,611,613 $3.00 -- $4.50 $3.75
========= =========== =====
</TABLE>

At February 28, 1997, the weighted-average exercise price of outstanding
stock options and warrants is $3.92 and $3.21, respectively, and 912,647
combined options and warrants are exercisable.

Adjusted pro forma information regarding net income (loss) is required by
SFAS 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using the "minimal
value" method for option pricing with the following weighted-average
assumptions: risk-free interest rate range from 5.5% to 6.3%; dividend yield of
0%; and a weighted average expected life of the options of 6 years. The
Company's pro forma information is as follows:

<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
AUGUST 31, 1996 FEBRUARY 28, 1997
--------------- -----------------
<S> <C> <C>
Adjusted pro forma net income (loss).......................... $(1,255,177) $ 268,069
Adjusted pro forma net income (loss) per share................ $ (0.29) $ 0.05
</TABLE>

The weighted average fair value of stock options granted during 1996 and
1997 was $1.39 and $1.40, respectively. The weighted average remaining life of
the options at February 28, 1997 is approximately six years.

In March 1997, the Company recorded $100,000 of deferred compensation for
66,666 options granted in March. This amount represents the difference between
the option exercise price and the deemed fair market value for financial
statement presentation purposes. The deferred compensation will be amortized
over the vesting period.

F-14
<PAGE> 73

LASER POWER CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Shares Reserved for Future Issuance

The following shares of common stock are reserved for future issuance:

<TABLE>
<CAPTION>
AUGUST 31, FEBRUARY 28,
1996 1997
---------- ------------
<S> <C> <C>
Subordinated convertible debentures.......................... 553,333 368,888
Stock options:
Granted and outstanding.................................... 894,642 1,224,953
Reserved for future grants................................. 249,679 120,700
Warrants..................................................... 333,330 386,660
--------- ---------
2,030,984 2,101,201
========= =========
</TABLE>

Changes in Capitalization

On March 25, 1997, the Company's Board of Directors authorized a 1 for 1.5
reverse stock split of all outstanding common stock. In addition, the Board also
approved a change in the par value of the common stock from $0.125 to $0.001.
All share and per share amounts and stock option and warrants data have been
restated to retroactively reflect these changes in capitalization.

On March 25, 1997, the Company adopted the 1997 Equity Incentive Plan (the
"1997 Plan"). The 1997 Plan provides for incentive stock options and stock
appreciation rights appurtenant thereto for employees (including officers and
employee directors), and nonstatutory stock options, stock appreciation rights
appurtenant thereto, stock bonuses and rights to purchase restricted stock for
employees (including officers and employee directors) and non-employee directors
and consultants. The 1997 Plan is administered by the Board of Directors, or a
Committee appointed by the Board, which determines the option awards to be
granted, including exercise prices, number of shares subject to the awards and
the exercisability thereof, provided that such terms comply with the provisions
of the plan under which the option award is granted. Non-employee directors are
eligible only for nonstatutory grants. The term of the stock options granted
under the 1997 Plan may not exceed 10 years. The exercise price of options
granted under the 1997 Plan is determined by the Board of Directors, but in the
case of an incentive stock option, cannot be less than 100% of the fair market
value of the common stock on the date of grant and in the case of a
non-statutory stock option, cannot be less than 85% of the fair market value of
the common stock on the date of grant. Options granted under the plans vest at
the rate specified in the option agreement. The Board has authorized and secured
an aggregate of 1,000,000 shares of common stock for issuance under the Plan.
The Board also terminated the 1981 and 1993 Plans and no additional options will
be granted thereunder, but outstanding options remain exercisable and continue
to vest until they terminate in accordance with their terms.

On March 25, 1997 the Company adopted the Employee Stock Purchase Plan (the
"Purchase Plan") covering an aggregate of 250,000 shares of common stock. The
Purchase Plan is intended to qualify as an employee stock purchase plan within
the meaning of Section 423 of the Code. Under the Purchase Plan, the Board may
authorize participation by eligible employees, including officers, in periodic
offerings following the commencement of the Purchase Plan. The initial offering
under the Purchase Plan shall commence on the closing of the Company's initial
public offering contemplated by this Prospectus and terminate on February 28,
1998. Sequential six-month offerings will occur thereafter.

6. COMMITMENTS AND CONTINGENCIES

Lease Commitments

The Company leases its operating, office and other facilities as well as
certain vehicles and equipment under noncancellable operating leases. The
operating and office facilities lease contains escalation clauses and an option
for renewal and extends through December 2001. The operating and office
facilities lease also

F-15
<PAGE> 74

LASER POWER CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

provides for deferred payment terms; however, for financial reporting purposes,
rent expense is recorded evenly over the term of the lease.

Deferred rent, as reflected in the accompanying consolidated balance sheet,
represents the difference between rent expense accrued and amounts paid under
the terms of the lease agreement. Future minimum rental payments (excluding
common area maintenance charges) required under the operating leases for each of
the remaining fiscal years ending subsequent to February 28, 1997 are as
follows:

<TABLE>
<S> <C>
1997............................................................. $ 403,000
1998............................................................. 788,000
1999............................................................. 714,000
2000............................................................. 688,000
2001............................................................. 684,000
Thereafter....................................................... 228,000
----------
$3,505,000
==========
</TABLE>

Rent expense was $849,000, $844,000, $914,000, $508,000, and $540,000 for
the years ended August 31, 1994, 1995, 1996 and the six months ended February
29, 1996 and February 28, 1997, respectively.

Contingency

The Company has a license to certain technology used in its blue
microlaser. During 1996, the Company received a letter from a third party
claiming that the Company's license was granted improperly by the licensor.
While the Company believes that such license was properly granted, there can be
no assurance that the Company's license would not be voided if subjected to a
legal challenge. In such an event, there can be no assurance that the Company
would be able to obtain a replacement license on favorable terms, if at all.
Failure to obtain such a license would result in a material adverse effect to
the Company's business, financial condition and results of operations.

7. GEOGRAPHIC INFORMATION

The Company operates in one business segment and designs, manufactures and
markets high performance laser optics for industrial, medical and military laser
and laser systems. No one customer accounted for more than 10% of revenues in
1994, 1995, 1996 or 1997. Export sales from U.S. operations to unaffiliated
customers located principally in Europe and the Asia Pacific region amounted to
32%, 32%, 32%, 30%, and 38% of total revenue in 1994, 1995, 1996 and for the
six-month periods ended February 29, 1996 and February 28, 1997, respectively.

Information with respect to the Company's operations by significant
geographic area is set forth below. Transfers between geographic areas have been
shown at the agreed upon transfer price. All transactions denominated in foreign
currency have been translated at the average exchange rates during the period.

The identifiable assets located in the United States include assets located
in Mexico, which are not considered significant.

F-16
<PAGE> 75

LASER POWER CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, 1994
----------------------------------------------------------
UNITED CONSOLIDATED
STATES EUROPE ELIMINATIONS TOTAL
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Sales to unaffiliated customers........ $10,098,661 $1,786,352 $ -- $11,885,013
Transfers between geographic areas..... $ 827,382 -- $ (827,382) --
----------- ---------- ----------- -----------
Total revenue.......................... $10,926,043 $1,786,352 $ (827,382) $11,885,013
========== ========= ========== ==========
Income (loss) before income taxes...... $ (722,852) $ (227,020) $ (63,467) $(1,013,339)
========== ========= ========== ==========
Identifiable assets.................... $ 9,360,098 $1,657,792 $(1,574,105) $ 9,443,785
========== ========= ========== ==========
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, 1995
----------------------------------------------------------
UNITED CONSOLIDATED
STATES EUROPE ELIMINATIONS TOTAL
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Sales to unaffiliated customers........ $11,831,280 $2,741,641 $ -- $14,572,921
Transfers between geographic areas..... $ 813,461 -- $ (813,461) --
----------- ---------- ----------- -----------
Total revenue.......................... $12,644,741 $2,741,641 $ (813,461) $14,572,921
========== ========= ========== ==========
Income (loss) before income taxes...... $(2,062,437) $ (195,466) $ 11,543 $(2,246,360)
========== ========= ========== ==========
Identifiable assets.................... $10,346,281 $1,822,831 $(1,961,672) $10,207,440
========== ========= ========== ==========
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, 1996
-----------------------------------------------------------
UNITED CONSOLIDATED
STATES EUROPE ELIMINATIONS TOTAL
----------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Sales to unaffiliated customers....... $15,462,416 $3,445,023 $ -- $ 18,907,439
Transfers between geographic areas.... $ 1,195,380 -- $(1,195,380) --
----------- ---------- ----------- ------------
Total revenue......................... $16,657,796 $3,445,023 $(1,195,380) $(18,907,439)
========== ========= ========== ===========
Income (loss) before income taxes..... $(1,282,844) $ 105,931 $ (40,747) $ (1,217,660)
========== ========= ========== ===========
Identifiable assets................... $11,286,833 $1,994,440 $(2,087,574) $ 11,193,699
========== ========= ========== ===========
</TABLE>

8. EMPLOYEE BENEFIT PLAN

The Company has a defined contribution plan (the "Plan") covering
substantially all employees that have been employed for at least one year and
meet certain age requirements. Employees may contribute up to 16% of their
compensation per year (subject to a maximum limit by federal tax law). The
Company is obligated to make matching contributions equal to 50% of the
employee's contribution up to a maximum of 6% of the employee's compensation. At
the discretion of the Board of Directors, the Company may make additional
contributions. The Company's contributions charged to operations were $42,000,
$57,000, $79,000, $36,000 and $56,000 for the years ended August 31, 1994, 1995,
1996 and the six months ended February 29, 1996 and February 28, 1997,
respectively.

9. AGREEMENT WITH PROXIMA CORPORATION

The Company and Proxima Corporation, a major shareholder, have entered into
a Cooperative Development and License Agreement (the "Agreement") which provides
for licensing of existing technology and technologies being developed under the
terms of the agreement.

Included in internal research and development expenses in the accompanying
statements of operations are $779,000, $2,107,000, $1,630,000 and $981,000 spent
in accordance with the Agreement in 1994, 1995, 1996 and the six months ended
February 29, 1996, respectively. No amounts were spent during the six month
period ended February 28, 1997 and at February 28, 1997, the Company has
committed to spend an additional $131,000.

F-17
<PAGE> 76

[Depiction of a military aircraft emitting a laser beam]

DEFENSE

Laser Power's very low absorption thin film coatings have made major
contributions to on-going United States programs to develop ground, air and
space laser weapons for missile defense.

AUTOMOTIVE

Because of its ability to change operating characteristics instantly under
computer control, laser based material processing is an ideal match for the
automotive industry's need to compress the design to production cycle, reduce
production changeover time and configure machines to meet changing market
demands. High power lasers for cutting, welding, drilling, heat treating and
surface cladding are used in increasing numbers throughout the automotive
industry, including the processing of sheet metal door and body panels,
electronic components, fuel management systems, drive train and engine
components, safety systems and prototype models.

[large photograph of an automobile with smaller photographs showing detailed
component parts and a laser's role in their manufacture: (clockwise) detail
photo 1: body panels; 2: engine components; 3: drive train assembly; 4: door
side beams; 5: exhaust systems]

MEDICINE

Medical CO(2) lasers are used for numerous cosmetic, therapeutic and surgical
procedures in hospital, clinical and outpatient settings because of reduced
blood loss and less post-operative discomfort. Recent developments in laser skin
resurfacing and permanent wrinkle removal have stimulated strong growth in this
market segment.

[Photograph of an operating room with physician performing laser surgery]
<PAGE> 77

======================================================

NO DEALER, SALES REPRESENTATIVE OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION AND
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY, ANY SELLING STOCKHOLDER OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO BUY TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER
OR SOLICITATION WOULD BE UNLAWFUL OR TO ANY PERSON TO WHOM IT IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATIONS THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 5
Use of Proceeds....................... 12
Dividend Policy....................... 12
Capitalization........................ 13
Dilution.............................. 14
Selected Consolidated Financial
Information......................... 15
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 16
Business.............................. 22
Glossary of Terms..................... 36
Management............................ 37
Certain Transactions.................. 46
Principal and Selling Stockholders.... 48
Description of Capital Stock.......... 50
Shares Eligible for Future Sale....... 52
Underwriting.......................... 54
Legal Matters......................... 56
Experts............................... 56
Additional Information................ 56
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>

------------------------

UNTIL , 1997 (25 DAYS AFTER THE
DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON
STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.

======================================================

2,400,000 SHARES

[LASER POWER LOGO]

COMMON STOCK

--------------------
PROSPECTUS
--------------------

CRUTTENDEN ROTH
INCORPORATED

L.H. FRIEND, WEINRESS,
FRANKSON & PRESSON, INC.

, 1997

======================================================